China has been long pushing for its currency to overtake the dollar and alter its influence
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China has been the face of many radical innovations over the years, and that along with its immense industrial capacity has led to the silent rise of China as an important global player, posed to be one of the biggest threats to US supremacy.
It was said that China wants to be the first country in the world to issue a digital currency in an attempt to retain and maintain this position in the current international order and to challenge the dollar payment system.
China conducted their largest pilot project for a cashless economy last Sunday by distributing 200 digital yuans to 50,000 customers selected on a random basis by lottery, and these were referred to as ‘red envelopes’ denoting the Chinese tradition of gifting money!
A total of ¥10 million (about 11 crores rupees) worth of the digital currency has been distributed, and so far, 3.13 million transactions have been done, amounting to about 1.1 billion yuan ($162 million)
Several lifestyle apps like transport hailer and a food delivery platform called have also been made a part of this programme. This is the first trial and the second one will be conducted during the 2022 Winter Olympics. The digital currencies are being introduced in four Chinese cities as of now — Shenzhen, Suzhou, Xi’ and Chengdu, and are being supported by four major national banks of the country, three major telecommunications companies.
Over 3000 merchants have been roped in, who are accepting the digital currency. And few American restaurant-chains like McDonald’s, Starbucks, and Subway are also participating in this trial.
The People's Bank of China (PCOB) in a commentary said,
China has many advantages and opportunities in issuing fiat digital currencies, so it should accelerate the pace to seize the first track.
The article, which was published in China Finance, a magazine run by the PCOB also elaborates on how this race for releasing a digital currency had the potential to become the new battlefield amongst sovereign countries.
This digital currency is just a digital version of their official currency, the Yuan, and not a cryptocurrency, the rising popularity of which is a matter of concern for the banking systems. This digital currency does not use blockchain or distributed ledger technology, and thus cannot be validated without the existence of banks.
Currency manipulation by China
Economies around the world are in a whirlwind as a result of the coronavirus induced recession. However, while China’s economy had crashed at the beginning of the pandemic, it has recovered considerably, and the Chinese Yuan just had its best quarter in 12 years.
The onshore renminbi gained almost 4 percent in the three-month period ending Sept, the most since early 2008, while its offshore counterpart advanced more than 4 percent.
This growth of the rénminbi has incited talks that China’s economy, unlike the United States can be future proof and risk-averse.
It has already become the world’s second-largest economy and is now one of the largest contributors to global growth. If the People’s Republic of China (PRC) continues on its present growth track, it may soon take over from the United States of America (USA) as the world’s largest economy, and the renminbi is also slated to be one of the major international currencies.
The relative value of a currency is important here, as that determines the purchasing power. So, the ultimate aim of this move is to pose the Yuan as a reliable currency, which in turn will help in fostering exports. However, China has been designated by US for manipulating their currency over a period of time.
China did allow the value of its currency to fall in August of 2019, when the exchange rate fell below 7 renminbi to the dollar for the first time since 2008. Some policymakers and experts are of the opinion that this currency manipulation can be one of the most important issues that international economic policy could address, a designation not supported by the International Monetary Fund.
Between 2003 to about 2013, various economists have claimed that China consistently intervened to depreciate the yuan by buying up billions of dollars in foreign currency, but this had mostly negative connotations and outcomes.
Internationalisation of Renminbi
When Xi Jinping assumed office as the president in 2013, he had pledged that the new administration would be committed to reform China’s economy in a more market-oriented direction.
This project of digitising the Yuan is not a new one at all, and has been underway since 2014, but details about it were released only last year. Further details like when this digital yuan is slated for official release is still unclear, but China is vying to be the first country to successfully do so to pose a challenge to the supremacy of the dollar around the world.
It must be kept in mind that China is not the only country to think and work on Central Bank Digital Currencies (CBDC). But their project is by far the most advanced as of now.
The digital infrastructure to use this CBDC is not something that the citizens are unaware of. Alipay and WeChat Pay are some of the existing digital platforms, where users can download digital wallets to store their money. The wallet then generates a QR code, which is scanned wherever payment has to be done. The digital yuan also works in a similar fashion.
The banks have a crucial role to play in the success of this currency.
As digitising the currency is an effort to reduce the number of banknotes and coins in circulation, the commercial banks will have to deposit the amount identical to the amount of digital yuan they distribute.
If the digital currency is used, the Chinese policymakers will be able to track and trace how the money flows in the economy.
This helps with curbing illegal activities and illicit flow of funds.
China has had plans for world domination for a long time now, and internationalising the official currency is just a step towards that goal. Digitising yuan will thus be helping in shaping the monetary policy better, encourage users in other countries to use it and in certain cases, even allow the policymakers to have negative interest rates for cash.
Long term vision of the dragon
Given the US-China trade war and discussion in academic circles about China emerging as the next superpower, the biggest external goal of this currency is definitely internationalisation. The fact that China still is actively developing their very ambitious Belt and Road Initiative (formerly the One Belt One Road Model) to link infrastructure and development projects in 60 countries is also crucial when it comes to analysing the importance and implications of a digital yuan.
While Chinese citizens are generally adept and receptive to innovation, especially in the field of finance, it is to be seen how the state-backed digital currency fares in terms of regulatory challenges and data privacy issues.
But if the experiments turn out to be successful and sustainable, it will only drive China’s blockchain and big data development growth with regards to settlements, liquidity monitoring and external payments positions further ahead.
This move is definitely a step towards the grand plan of consolidating an international hegemony as a world power. This test drive serves as a bellwether of change for the rest of the country and according to Chinese aspirations, eventually the world. The fact that digital Yuan is easy to use and easily convertible into several international currencies is a given advantage in the path to its global acceptance and usage.
While this power struggle and ascendancy in dominance is an ongoing affair between China and the US, it is only to be seen if the introduction of the digital currency has a catalytic effect on deeper financial and technological conflict. If successful, CBDC has the potential to divide the global economy into set currency zones.
Given the COVID 19 pandemic and the resultant social distancing and quarantining norms, coupled with US impending recession and China’s recent growth in GDP projections that people are having to follow, this digitisation may just turn out to be a highly successful endeavour.
A widespread roll out of Chinese digital currency can be influential.
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