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China’s new digital currency - Total control
Read more on - Polity | Economy | Schemes | S&T | Environment
- Digital renminbi as arrived: In the February 2021 festival season in China, authorities in many cities gave away tens of millions of renminbi as new year “red packets” that can be downloaded on to a smartphone. Beijing and Suzhou doled out 2,00,000 red packets worth Rmb200 ($31) each in a public lottery.
- Deeper agenda: Such visible generosity hides a deeper agenda. By handing out the traditional red packets in the form of “digital renminbi”, China’s authorities are conducting trials for a crucial new technology that could lead the world’s adoption of digital currencies and set global technical standards. Although no official launch date has been announced, China is intent on becoming the first large economy to introduce a digital currency, showcasing its position as the global leader in payments technology to the world at 2022's Winter Olympics. Cambodia launched a digital currency, the Bakong, late in 2020.
- Way ahead: Chinese policymakers are by far the most advanced in their thinking about a digital currency, and are thinking about things that the rest of the world is nowhere near thinking about yet. The digital renminbi will put every transaction on to the radar of the People’s Bank of China [central bank].
- International footprint: China’s digital plan dovetails with broader ambitions for its currency as Beijing hopes the technology will help promote the renminbi internationally and weaken the US dollar’s supremacy. While bankers say the focus initially will be on using the digital currency in the domestic economy, it will probably be used for trade settlement in a number of years.
- West versus East: While in the US, cryptocurrencies are steeped in the language of libertarianism, in China the digital currency project is tied up in the Communist party’s drive to maintain control over society and the economy. The technology is partly designed to reinforce its surveillance state.
- China’s digital renminbi is a “central bank digital currency”, making it in some ways the opposite of cryptocurrencies such as bitcoin.
- Cryptocurrencies are often decentralised; they are not issued or backed by governments.
- The “e-yuan”, by contrast, is part of China’s top-down design. It is issued and regulated by the central bank and its status as legal tender is guaranteed by the Chinese state.
- Its digital format enables the central bank to track all transactions at the individual level in real time. Beijing aims to use this feature to combat money laundering, corruption and the financing of “terrorism” at home by strengthening the already formidable surveillance powers of the ruling Communist party.
- Beijing also hopes to use the digital renminbi as a means to reassert state control over its fintech industry and a vast e-payments market that is dominated by two huge private companies, Ant Group and Tencent.
- The technology could in effect become a rival to their cashless payments platforms.
- China’s government is already engaged in a multipronged effort to rein in the power of the new payments firms, which led to Ant cancelling a planned $37bn initial public offering at the end of 2020.
- Fintech takeover: China’s strategy is to popularise the digital currency by running city-level trials in 2021 and 2022, having it ready for use by the time it hosts the Winter Olympic Games in late 2022. Some 60 per cent of more than 60 central banks surveyed by the Bank for International Settlements in 2020 had said they were “conducting experiments or proof-of-concept” studies on digital currencies, up from 42 per cent in 2019.
- What it will do: The digital renminbi will be distributed directly to the e-wallets of users by state-owned banks, thus setting up payments channels that circumvent Alipay and WeChat Pay. Users so far have been able to withdraw e-yuan via ATM machines on to their smartphones’ e-wallets. Then they pay for items by holding their smartphone app close to an e-yuan point-of-sale device. Such a system represents a clear alternative to Alipay and WeChat Pay, which are estimated to have a combined worldwide active user base of around 1.9bn.
- Private power: Today, Alipay and WeChat Pay not only form the backbone of China’s payments system in an economy that is already largely cashless. Their business also supports the share prices of Tencent, which is one of the world’s 10 largest companies with a capitalisation of more than $ 920 bn, and Alibaba, which owns a stake in Ant Group. The digital currency will deal a blow to Alipay and WeChat as it could replace them.
- Sovereign power: As the digital renminbi is legal tender, no merchant can refuse to accept it and will, therefore, be obliged to install e-yuan terminals and payments systems after the currency is formally launched. The same is not the case for Alipay and WeChat Pay, which merchants are at liberty to refuse.
- Centralised: China regards its centralised banking system as a crucial instrument of the party-state's economic power. Whenever its control is threatened, as it was by the flowering of a freewheeling peer-to-peer lending sector as recently as 2016, the authorities move decisively to reassert their influence. Only some 29 of as many as 6,000 peer-to-peer lenders now remain following Beijing's clean-up campaign. Similarly, the extraordinary success of Ant Group, before its share offering was axed, was seen as a threat by a powerful lobby of Chinese state-owned banks.
- Downside: The digital renminbi is likely to be a boon for CCP surveillance in the economy and for government interference in the lives of Chinese citizens. But if the Communist party will get insight into every trade we do through the digital renminbi, then I think a lot of people outside China will prefer not to use it. China has formed a joint venture with Swift, the Belgium-based global system for cross-border payments, in a move aimed at promoting use of the digital renminbi. The new entity, called Finance Gateway Information Services Co, is charged with integrating information systems to facilitate the rollout of the digital currency.
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