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.
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.