Arriving in the midst of an intensifying great power competition between China and the United States, the digital Renminbi (RMB) has been the subject of intense speculation and hype since its launch in October 2020, mostly from observers outside of China who overstate its potential capabilities. On November 2, Hong Kong’s Secretary for Financial Services and the Treasury, Mr. Eddie Hui Ching-yu, said at a Fintech Week event that he would promote digital RMB for retail settlement in the Hong Kong market, allowing tourists visiting Hong Kong to use the digital currency for retail spending (Sohu, November 2). Across the Taiwan Strait, Xiamen Xiangyu Group (厦门象屿集团有限公司) successfully issued the first cross-strait digital RMB bond, worth RMB 500 million ($68.7 billion), the proceeds of which will be mainly used for the company’s Taiwan-related capital needs. This move was touted as boosting cross-strait integration and development (East Money, November 2).
There are fears that China might “mint the money of the future” through its central bank digital currency (CBDC) (Bloomberg Opinion, April 4, 2021), and academics have argued that “China’s central bank digital currency will transform the international monetary and financial systems” (University of Oxford Law Blog, November 18, 2022). Such analyses overlook the fact that Beijing has resisted expected further liberalization of its financial system since Xi Jinping came to power in 2012, and in particular since China’s 2015 stock market crash—widely believed to have spooked the Chinese leader. With his increasing focus on national security (People.cn, May 30), Xi will be highly unlikely to sign off on a loosening of foreign exchange and capital controls necessary to fast-track internationalization of the RMB, especially with capital outflows hitting a seven-year high of $75 million in September (South China Morning Post, October 23). With the Chinese capital account remaining closed, the digital RMB will encounter the same internationalization challenges as the physical fiat currency.
Beijing will seek to selectively boost cross-border use of its digital currency, notably through Project mBridge, in which the Bank of International Settlements (BIS), Hong Kong, Thailand, and the United Arab Emirates (UAE) are also participating (China Construction Bank, September 28, 2022). At the recent Belt and Road Initiative Forum in Beijing, the UAE and China signed two agreements focused on digital currency: one between the Bank of China and the UAE’s Bank of Abu Dhabi, and another between the People’s Bank of China and the Central Bank of the UAE (The Third Belt and Road Forum for International Cooperation, October 18). However, Beijing’s primary focus in the short and medium terms will be the domestic market, where it seeks to gain greater control over digital payments that have historically been dominated by the technology juggernauts Alibaba and Tencent. However, that will be an uphill battle given the popularity of those payment systems and the lack of clear advantages for consumers and businesses to transacting in its CBDC.
In July, former People’s Bank of China (PBOC) governor Yi Gang (易纲), speaking at an event organized by the Monetary Authority of Singapore (MAS), said that total CBDC transactions had jumped to RMB 1.8 trillion ($247 billion) as of the end of June, an exponential (1,699 percent) increase from RMB 100 billion ($13.7 billion) as of August 2022. While that data suggest that adoption of the digital currency is indeed picking up speed, it is important to note that as a share of the overall cash in circulation in China, this figure remains a miniscule 0.16 percent (Mpaypass.com.cn, August 1).
Qin Xuan (秦璇) who holds a PhD in accounting from Fudan University, explored why adoption of the CBDC has been slow in a recent interview. “After all, the digital Renminbi is something new,” Qin said. For it to gain mass adoption, a number of issues need to be addressed, such as its stability and reliability, incentives for commercial banks and other institutions, and “how to balance the relationship with third-party payments such as WeChat and Alipay,” Qin added (The Paper, September 12). This point about Alipay and WeChat Pay is particularly salient. Chinese leader Xi Jinping has presided over a severe crackdown on China’s erstwhile high-flying internet economy, nominally in a bid to curb the monopolistic power of platform companies and the so-called “disorderly expansion of capital”—a phrase that began appearing regularly in state media around the time that Ant Group’s planned initial public offering in Hong Kong and Shanghai was aborted (see China Brief, December 23, 2020). At China’s Central Economic Work Conference held in December 2020, strengthening anti-monopoly work and preventing disorderly expansion of capital were highlighted as “key tasks” for the first time (Gov.cn, December 27, 2020). Thereafter, both Alibaba and Tencent were forced to restructure. Beijing also forced Alibaba to break up its once-lucrative digital financial services business to reduce risk and give the Communist Party greater oversight.
While Beijing has never explicitly called for the digital RMB to replace the internet giants’ payment systems, it nevertheless has sought to dilute their duopolistic grip over a market that was worth $70 trillion in 2022 (Pbc.gov.cn, March 27). Yet the effort has not been successful to date. Together, Alipay and WeChat Pay still have about a 90 percent share of China’s mobile payments market (The South China Morning Post, May 4). Chinese consumers may resent some of the internet giants’ admittedly monopolistic behaviors, but the platforms are so embedded into everyday life in China that it is nearly impossible to live without them. The CBDC does not offer consumers any compelling benefits over existing digital payment methods integrated with the respective ecosystems of the internet giants, which span everything from e-commerce to retail banking to entertainment. For that reason, Beijing has pressed Alipay and WeChat Pay to promote the digital yuan through their respective platforms. At a recent financial forum, Mu Changchun (穆长春), director of the PBOC’s Digital Currency Institute, called for a unified QR code for retail payments that could ensure the digital RMB could be used for any retail transaction. Implicit in his speech was an expectation that Alipay and WeChat Pay would improve their respective interoperability with the CBDC (The Paper, September 3).
Concurrent with its efforts to promote the digital currency domestically, Beijing is exploring cross-border use cases. These initiatives are more nascent than domestic pilots. Even though about 130 countries are experimenting with CBDCs, China is the only major economy to launch one (The Atlantic Council, June).
China has spearheaded the first large-scale cross-border CBDC project covering trade settlement and interbank transfers, mBridge, named for its custom-built blockchain. From August 15 to September 23, 2022, mBridge was tested in a pilot involving real-value transactions that included 20 commercial banks from China, Hong Kong, the UAE, and Thailand. Over $12 million was issued on the platform, facilitating over 160 payment and foreign exchange payment-versus-payment (PvP) transactions valued at more than $22 million overall (China Daily, November 1, 2022). The ostensible purpose of mBridge is to make cross-border payments more seamless than they otherwise can be due to cumbersome correspondent banking networks. Colin Pou Hak-wan, executive director of financial infrastructure at the Hong Kong Monetary Authority (HKMA), said last year that the project could boost connectivity in international payments and facilitate international trade. Thus, “cross-border transfers could shorten from multiple days to near real-time,” he said. (China Daily, November 1, 2022). Yet existing real-time payment solutions, such as the interbank messaging network Society for Worldwide Interbank Financial Telecommunication’s (SWIFT) Global Payments Innovation (GPI) platform, launched in 2018, have already solved most of the issues on which mBridge purports to be focused. SWIFT GPI counts 4,000 financial institutions in its network. $300 billion is sent each day on the network in 150 different currencies (SWIFT, accessed November 4).
An additional motivation for mBridge—at least from Beijing’s perspective—is to develop a global payment system that could circumvent the US dollar and the SWIFT network over which Washington exerts strong influence. On the one hand, China intends to make itself more sanction-resistant, but even if Beijing and Washington manage to avoid financial war, the Chinese Communist Party (CCP) is determined to chip away at so-called “dollar hegemony” with a multilateral blockchain-based cross-border payments system that excludes the United States. Indeed, the Chinese Communist Party (CCP) remains deeply unsettled by the US dollar’s dominance. “The hegemony of the US dollar is the main source of instability and uncertainty in the world economy,” China’s Ministry of Foreign Affairs said in a February report (FMPRC, February 20).
At Hong Kong’s FinTech Week in 2022, Mu Changchun explained how mBridge could potentially give the RMB a larger global role. He said that the platform is designed to allow participation by central banks, whether or not they have already established their own domestic CBDC system, possibly negating the need for dollars in foreign exchange. “You can also adopt these existing traditional payment systems such as RTGS [real-time gross settlement] or FPS [Faster Payment System], so that central banks or monetary authorities can issue their own CBDC on mBridge without establishing their own CBDC system,” Mu said (South China Morning Post, November 2, 2022).
Rising Domestic Use, Selective Cross-Border Applications
Looking ahead, the digital RMB is likely to gain traction fastest in areas where the CCP can mandate its use. That means domestically, and especially in the state economy. To that end, beginning in May, thousands of government workers and employees of state-owned companies in Changshu (常熟), a major city in Jiangsu Province, began to receive their salaries entirely in CBDC (CCTV.com, May 19). Pilots that began in 2019 have since expanded to 26 pilot areas in 17 provinces and special municipalities, including Shanghai, Shenzhen, and Xi’an (People.cn, December 20, 2022).
While there are concerns about privacy, it is unlikely that these will dissuade Beijing from increasing circulation of the digital RMB where it can. Chinese laws forbid telecommunication operators and internet service providers from gathering and using the personal data of digital RMB account holders, but given the ascendancy of national security in Xi Jinping’s China, it can be assumed that authorities will have access to such data if they deem it necessary (see China Brief, December 21, 2015, February 26, 2021).
Some of the most prominent public faces of China’s CBDC emphasize that it supports “controllable anonymity”: Users can choose how much personal information they want to provide through the app. In a long commentary published last year, Mu Changchun said that if CBDC users refuse to provide personal information through the app, it “will strictly implement” their requests, adding that it is “designed to protect personal privacy” (Finance 40 Forum, October 8, 2022). Irrespective of the actual amount of privacy protection the CBDC offers, it is likely to be greeted with suspicion in any country which has strained ties with China, which at this point encompasses most advanced economies. Yet developing countries and others friendly with China, especially those with ties to Beijing through the Belt and Road Initiative (BRI), may be more amenable to adopting it in some regard.
The mBridge project should be observed closely to see if it comes to fruition. All the participants in mBridge are also involved with BRI, with the UAE an especially enthusiastic booster of both the mammoth infrastructure initiative and China’s digital currency. Underlying such deals are a persistent concern that tensions between China and the United States could eventually escalate to the point that Beijing would be the target of sanctions. China and its key partners want to explore how this CBDC can help them prepare for that possibility. “For soundness, we need highly resilient robustness,” UAE advisor Shu-Pui Li said at Hong Kong Fintech Week last year. “We cannot tolerate any disruption. At the moment, we see that happening” (Ledger Insights, November 1, 2022).
“Resilient robustness” could be interpreted to mean a China-centric digital payments rail in which transactions are settled in digital RMB, and thus can be immune to any American pressure. Yet to reach that stage, much work remains to be done. To ensure widespread participation, Beijing will have to successfully make the case that there are clear economic and financial benefits to participating countries beyond insurance against hypothetical American sanctions. Additionally, the continued tight restrictions on the Chinese currency’s exchange rate and the capital account will limit what the digital RMB can achieve internationally.