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Understanding China’s Digital Currency: Digital Yuan

About Digital Yuan

China’s digital currency is called the Yuan. This currency is often referred to as e-RMB, e-CNY, or e-yuan, in direct opposition to cryptocurrencies, mobile payment apps, and business payment systems. The Chinese central bank controls this digital currency and the key goal of the currency is to switch the current fiat money in China. Cash payments will eventually be replaced by digital ones since their usage is declining quickly.

China’s digital payments market is dominated by WeChat Pay and Alipay. In order to increase competition in the payment industry, the Peoples Bank of China introduced the ‘Digital Yuan’. Alipay and WeChat are also owned by private corporations, so if they fail, systematic risk comes up.

The Uniqueness of Digital Yuan

The digital yuan and other cryptocurrencies differ from each other significantly. The legal status of the digital Yuan is one of its most notable features due to the way it is positioned as a form of legal money. The centralized structure of some cryptocurrencies, including Bitcoin and Ethereum, is absent. Therefore, neither a bank nor a government body can regulate how this digital currency is used. On the other hand, the centralized state-formed structure of the digital Yuan currency. All Yuan-related activities are governed by the Chinese government.

Another characteristic that sets the digital Yuan apart from other cryptocurrencies is ‘anonymity’. The benefit of anonymity is offered by other cryptocurrencies in existence to varying degrees. Instead, the Chinese government keeps an eye on how the digital Yuan is being used in its economy.

How does China Government Benefit from the Digital Yuan?

  1. The Chinese government will be able to better monitor the flow of money through its economy and make better planning decisions thanks to the digital currency. In China, cash is still the most common form of payment, but new payment methods that bypass the card system have climbed sharply in popularity recently. The foundation of these new payment systems is digital money transfers made possible via a variety of technology intermediates, such as mobile devices, QR codes, and token systems.

The forefront of this transition is being led by payment companies like WeChat from Tencent Holdings Limited (TCEHY) and AliPay from Alibaba Group Holding Limited (BABA). This change would be beautifully complemented by a Digital Yuan. Since digital tokens are simpler to track than physical currency, it also meets the needs of the government.

  1. Second, China will be able to integrate its unbanked populace into the global economy with the use of a Digital Yuan. A digital currency will make it possible for more people in China, where the number of individuals without access to a bank is highest, to participate in the global economy without having to use expensive financial goods and infrastructure.
  2. The possibility of the renminbi becoming an international reserve currency is a third advantage of the Digital Yuan. International bankers and economists have been debating the feasibility of a currency to replace the U.S. dollar for international commerce since the financial crisis more than ten years ago.

China’s currency ought to be a front-runner for the title since it serves as the primary means of exchange in the second-largest economy in the world. However, the renminbi only makes about 4% of all foreign settlement transactions; the U.S. dollar still dominates with 88.3%. The currency’s digitization will aid in accelerating cross-border settlements and increase its acceptance by global traders.

What are the Challenges of the Existing Dollar-Centric Financial System for China?

The post-Bretton Woods global economy saw the U.S. dollar take the lead as the dominating economic power. Since that time, the dollar has served as the centerpiece of the global financial system. The United States is currently the second-largest trading partner in the globe. Contrarily, even though China is the world’s greatest trading partner, fewer than 2% of the world’s reserves are represented by its currency.

Owing to this disparity between China’s trade share and the proportion of its currency in the global economy, the nation is nonetheless dependent on a financial system that diminishes its significance. China and the United States have been engaged in an intensifying trade war over the past few years. Due to its reliance on the dollar and its payment systems, China’s bargaining strength in a trade war has been drastically reduced.

Trial and Adoption of the Digital Yuan

In 2020, China’s digital money entered a preliminary test phase. Pilot projects were expanded in 2021 and ran through 2022. The adoption of the Digital Yuan is anticipated to take place in 2023 or 2024, depending on the outcome of the pilot projects and the length of time needed to fix any potential problems in the system.

Trials for digital money were launched by the People’s Bank of China in many Chinese cities, including Xiong’an, Suzhou, Shenzhen, and Chengdu. There were plans to expand the pilot program in a number of other important cities, including Tianjin, Beijing, Hong Kong, Macau, and Hebei Province.

Working of Digital Yuan

In addition to protecting personal information adequately, Digital Yuan also maintains sufficient records to allow for the investigation of criminal activity. The People’s Bank of China, which has centralized the Digital Yuan as money in circulation or MO, fully backs and regulates this virtual currency. The MO, or central bank terminology, claims that the PBOC is directly liable for the digital Yuan. Since e-CYN will contain some liabilities from commercial banks, the PBOC did not categorize it as M1 or M2.

Consumers can store their digital Yuan in digital wallets, which are not bank accounts. The Peoples Bank of China, on the other hand, demands a mobile phone number in order to use a digital Yuan wallet. Additionally, the digital Yuan can only be converted into bank deposits by banks. However, the administration has divided the digital Yuan project’s management into two phases: distribution and expenditure.

Conclusion

The Digital Yuan may eventually help in China’s long-term goal of internationalizing its currency, making it simpler to persuade consumers in other nations to use the yuan. The ultimate objective of China’s digital currency is to establish a cashless economy capable of improving consumer, business, and governmental efficiency. If this is widely adopted in China, other central banks may view this as evidence of the viability of CBDCs as well as an indication of growing rivalry, which may prompt them to intensify their attempts to create their own digital currencies.

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