Beijing pushes digital currency amid fears of a dollar planet

“The People’s Bank of China [PBOC] will become the first central bank to launch its own digital currency,” we predicted in our 2020 Red Paper published in January. This prediction was based largely on the enthusiasm that Beijing clearly had for blockchain technology in late October last year, when the National People’s Congress passed a new law on cryptography, and Xí Jìnpíng 习近平 gave a speech calling for “greater urgency in the development of blockchain technology.”

Pilot trials for that currency began in April.

• Four cities — Shenzhen, Suzhou, Chengdu, and Xiong’an — participated initially, with some civil servants in Suzhou beginning to receive half their transport subsidies in the new currency as a start, for example.
• The new currency is intended to replace some, but not all, of China’s existing monetary base.
• Unlike bitcoin, it is not anonymous. More tracking and control of currency flows is a large part of Beijing’s motivation for creating this.
• No timetable was announced at the time for a nationwide launch of the currency.
• The unofficial name of the currency then — DCEP, or digital currency electronic payment — is still used today.

Since then, private companies have begun participating in testing, including, according to CoinDesk, “food retailer Meituan-Dianping, video-streaming platform Bilibili and ride-hailing startup Didi Chuxing.”

A much larger official testing phase is now beginning, the Ministry of Commerce announced today. The Wall Street Journal reports:

The digital currency pilot program will cover much of China’s most prosperous regions, the Commerce Ministry said Friday: the capital Beijing and nearby Tianjin and Hebei province in the north; the Yangtze River Delta to the south; and, along China’s wealthy southern coast, Guangdong Province and the neighboring cities of Hong Kong and Macau.

Cities in the country’s poorer central and western regions that meet certain requirements will also roll out trials of the digital currency, the ministry said, adding that testing efforts were being led by the People’s Bank of China, the country’s central bank.

While there is, again, “no timeline” for how fast this next phase of testing will happen, the WSJ points out that “the Commerce Ministry said in a broader statement outlining service sector initiatives — including the digital currency — that the policy design should be completed by the end of 2020.”

Why is Beijing fast-tracking the rollout of a digital currency?

Geopolitics may be part of the reason. “A sharp escalation in tensions with the United States has stoked fears in China of a deepening financial war that could result in it being shut out of the global dollar system,” Reuters reported this week.

Some economists even float the idea of settling exports of China-made COVID-19 vaccines in yuan, and are looking to bypass dollar settlement with a digital version of the currency.

“Yuan internationalization was a good-to-have. It’s now becoming a must-have,” said Shuang Ding, head of Greater China economic research at Standard Chartered and a former economist at the People’s Bank of China (PBOC).

Already, for the first time, most recent Russia-China trade has avoided using the U.S. dollar, according to the Nikkei Asian Review. And as Bloomberg puts it today, “China may dismiss U.S. sanctions. Its banks can’t.”

• The bottom line: Diversifying currencies for transactions helps Beijing hedge against global political risk, in addition to the stated policy aims that include fighting money laundering and other financial crimes.