China’s central bank is handing out Rmb10 million ($1.5 million) worth of free digital tokens to people living in a suburb of the tech-heavy city of Shenzhen this week, as it pushes ahead with plans to roll out a national virtual currency.
The test scheme – a pilot-within-a-pilot – started on Monday and will run to the end of Sunday.
Citizens of Luohu, located on the border with Hong Kong, were given 50,000 digital vouchers, each with a face value of Rmb200, which they can spend in any of 3,400 designated retail outlets, from petrol stations to supermarkets.
Front-runner
Regulators in Beijing and beyond will be watching closely. China is widely seen as a front-runner in this field. It has moved further and faster toward the formation of its own digital currency than any other economy or bloc, including the US and Europe.
In April, the People’s Bank of China (PBoC) began to test different versions of a new tender in four areas, including Beijing, Shanghai and Guangdong province, with the backing of six of the largest state banks and leading digital payments and e-commerce firms.
It has stress-tested real and hypothetical scenarios, sources said, including how a digital yuan would be spent at notable public events, including the 2022 Winter Olympics, to be held in Beijing.
China loves a good pilot programme. They help its system of government figure out what kinds of needs and services companies, citizens and the Party really need.
Bragging rights are a consideration … but the key is to get ahead of the technology
Hong Kong-based analyst
A great amount of thought has been devoted to ensuring this pilot works and to being institutionally flexible enough to accept the outcomes, whatever they are.
So far, all seems well. On Monday, PBoC deputy governor Fan Yifei told the Sibos conference the pilot scheme had made “positive progress”.
Fan said the central bank had processed more than three million digital transactions since April, totalling Rmb1.1 billion, testing the currency against 6,700 scenarios and using technologies including barcode scanning and facial recognition.
That China seems to be ahead of its peers should not come as a surprise. Its plans to create a virtual currency stretch back to 2014, when it unveiled its digital currency electronic payment initiative.
China emerged last decade as a leader in digital payments. Total digital transactions hit Rmb201 trillion in 2019, according to Shanghai-based consultancy iResearch.
More than 600 million people use WeChat and Alipay, and few mainland citizens would likely blink twice at using their phone to pay for dinner using a digital renminbi. Unlike Europe, data privacy just isn’t an issue in the People’s Republic.
These factors have helped the central bank to move forward with relative alacrity.
Defensive
Analysts said that in the near term at least, Beijing’s primary aim is defensive in nature.
“Bragging rights are a consideration – it would like to be the first [economy] to bring a digital currency to market,” says a Hong Kong-based analyst. “But the key is to get ahead of the technology” – to ensure the Party is the controller, not the controlled.
Mu Changchun, the director of the central bank’s digital currency research institute, told Sibos this year that China had to issue its own digital currency “to safeguard [its] monetary sovereignty”.
It’s possible to see, lurking in the rear-view mirror of his public thoughts, the spectre of Libra, the cryptocurrency project backed by Facebook.
The main purpose … is stability and cost saving
Alexious Lee, Jefferies
The prospect of a new global digital currency not controlled by central banks but backed by and kept stable by their reserves is anathema to Beijing’s mandarins, who like their own hands on the tiller.
Facebook is banned in China, as are two of its other platforms, WhatsApp and Instagram.
Beijing has other reasons for pushing ahead with a new virtual tender. Last year, Mu said it would allow regulators to “spot certain behavioural patterns using big data”, and help government to “crack down on money laundering, tax evasion and financing terrorist groups”.
Others point to more prosaic benefits of a new centralized currency.
“The main purpose of the new digital currency is stability and cost saving,” says Alexious Lee, head of China strategy research at Jefferies. “It means you don’t have to print hard cash anymore, and it should also help to boost monetary stability.”
In a September 14 note, research firm GlobalSource Partners said the PBoC had also registered patents for “a system for interbank settlements that uses the currency and the integration of digital currency wallets into existing retail bank accounts”.
That suggests the central bank’s currency will indeed be a two-tiered structure. The first, linking the PBoC with the banking system, is nearly complete.
The second, existing at the retail level, is still in development.
“This is the area where the central bank is likely to avoid direct involvement in the market,” says GlobalSource’s China country analyst Andrew Collier.
That will leave the door open for the likes of Ant Group to build their own digital payments systems.
Ant is finalizing an initial stock offering in Hong Kong and Shanghai that could raise more than $30 billion, making it the largest IPO in history.
Internationalization
Longer term, China’s ambitions are less easy to divine.
The idea of Beijing using a state-backed digital currency to, say, finance projects in countries along the Belt and Road – from central Asia to west Africa – seems unlikely at present, with the pandemic-ravaged global economy in the doldrums.
However, Beijing thinks long term. The Party wants to internationalize the renminbi, in part to safeguard itself and its interests against the growing threat of US sanctions. A strong digital yuan, usable at home and overseas, would be a powerful weapon in its financial and institutional arsenal.
Long term, could it come to rival or even replace the US dollar as the paramount currency in nations heavily reliant on trade with China? Given enough time, it’s possible – and perhaps even likely.
If so, it will throw this week’s pilot programme in Shenzhen into sharp relief. It might look like just another small step forward for China. History might see it otherwise.
