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China’s Digital Currency Will Rise but Not Rule

Aug 25, 2020 Eswar Prasad

China’s new digital currency and its cross-border payments system will together enhance the renminbi’s role as an international payments currency if the government continues to reform the country’s financial markets and remove restrictions on capital flows. But they will hardly put a dent in the dollar’s status as the dominant global reserve currency.

ITHACA – A few years ago, China’s currency seemed to be rising inexorably to global dominance. The renminbi had become the fifth most important currency for international payments, and in 2016, the International Monetary Fund included it in the basket of major currencies that determines the value of Special Drawing Rights (the IMF’s global reserve asset).

Since then, however, the renminbi’s progress has stalled. Its share of international payments has fallen below 2%, and the share of global foreign-exchange reserves held in renminbi-denominated assets seems to have plateaued at about 2%.

Earlier this year, China rolled out a central-bank digital currency, making it one of the first major economies to do so. Trials of the so-called Digital Currency/Electronic Payment (DCEP) have started in four cities, and the government recently announced plans to expand the tests to major metropolises such as Beijing and Tianjin, as well as Hong Kong and Macau. But the DCEP on its own will not be a game changer that elevates the renminbi’s role in international finance.

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ogan.bilgic Sep 6, 2020

Not a very clear article mostly general statements.
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j. von Hettlingen Sep 3, 2020

Eswar Prasad says China seeks to internationalise its renminbi (RMB) as a payment currency, and the People’s Bank of China (PBOC) had launched the “Digital Currency/Electronic Payment (DCEP) system, stepping up its development of e-RMB. The PBOC hopes to facilitate cross-border payments, and “enchance” the reniminbi’s global role. The new digital currency is set to be the first operated by a major economy, and an ascent to globalising the RMB.
The author says the leadership in Beijing needs to seriously reform the country’s financial markets and remove restrictions on capital flows. With the launch of DCEP, the government plans to expand the trials to major metropolises such as Beijing and Tianjin, as well as Hong Kong and Macau, adopting into these cities’ monetary systems. Government employees and public servants started to receive their salaries in the digital currency since May.
Digital payment platforms are already widespread in China, namely Alipay, owned by Alibaba’s Ant Financial, and WeChat Pay, owned by Tencent. Yet they do not replace existing currency, because cash transactions were offline and transaction data from existing payment platforms was scattered, the PBOC was unable to monitor cash flow in real time. The DCEP “on its own will not be a game changer that elevates the renminbi’s role in international finance.”
It is true that “China has leapfrogged the United States and other advanced economies in the technological sophistication of its retail payment systems. It seems plausible, therefore, that the digital renminbi will give China an edge in the competition for global financial-market dominance,” and potentially “put a dent in the dollar’s status as the dominant global reserve currency.” However “the reality is more sobering,” and the DCEP will initially be “usable only for payments within China.”
Unlike other crypto-currencies like Bitcoin and Facebook’s Libra, China’s e-RMB is a sovereign digital currency, which is pegged to the national currency. The project had been under development since 2015, but in August the PBOC said it was ready to launch the DCEP system. Besides, the Covid-19 induced lockdown saw a decline in cash usage and the growing popularity of digital payment platforms, as people avoided physical contact amid a ravaging pandemic.
Beijing has been seeking to persuade more trade and investment partners to use RMB as a unit of account, means of payment, and store of value, including in foreign reserves. It is building an alternative to the Western-led Society for Worldwide Interbank Financial Telecommunication (SWIFT) system. And its own tech giants are creating huge e-commerce and digital-payments platforms (Alipay and WeChat Pay) that other countries could adopt in their own local currency.
The DCEP is an important innovation that makes it easier to use RMB for international transactions. It allows a sovereign digital currency to provide a functional alternative to the dollar settlement system and blunt the impact of any sanctions or threats of exclusion both at a country and company level. China hopes that its DCEP would facilitate integration into globally traded currency markets with a reduced risk of politically inspired disruption.
The author says “foreign and domestic investors are unlikely to view the renminbi as a safe-haven currency in times of global financial turmoil. That requires trust, which is fostered by adherence to the rule of law and well-established checks and balances in the political system.” With its “non-democratic, one-party system” of governance, China lacks “an institutionalized system of checks and balances such as that in the US, where the separation of the executive, legislative, and judicial branches serves to constrain the exercise of power.”
Although Trump has sought “to weaken America’s institutions, undermine the rule of law, and erode the Federal Reserve’s independence. But in international finance, everything is relative. America’s economic dominance, deep and liquid capital markets, and still-robust institutional framework” remain robust. As the US dollar still “has no serious rival” as the world’s leading reserve currency, no wonder we see Mafia-monsters, drug dealers and other criminals preferring dollars to RMBs, because they need the security that their ill-gotten gains are safe.
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Michael Public Aug 27, 2020

Nobody will want to use it because it belongs to China. What about the same thing underwritten by say the USA or the EU - would anyone be interested in that?
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Joseph Zorzin Aug 27, 2020

"US President Donald Trump’s administration is doing all it can to weaken America’s institutions, undermine the rule of law, and erode the Federal Reserve’s independence." With a crazy statement like that- this article should be dismissed. It's easy to trash Trump but it doesn't show serious thinking.
- Michael Public Aug 27, 2020
  
  Yes, the statement is hyperbolic - but many readers will understand what he wants to say - which is easily achieved by moderating the hyperbolic part. One could add some qualifiers and it would read fine. One hyperbolic statement does not invalidate an article - each idea must be evaluated individually, considering its underlying ideas as well.
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