One Way China Could Make Its Digital Yuan Go Global: Pay People To Use It

One Way China Could Make Its Digital Yuan Go Global: Pay People To Use It

Future of finance

New technology is upending everything in finance, from saving to trading to making payments.

By Mary Hui  Reporter  December 3, 2020

The digital yuan is the most advanced of all current central bank digital currencies projects worldwide. Over 2 billion digital yuan has been spent so far in pilot schemes across the country, and there are even counterfeits of the virtual currency.

But China’s ambitions go far beyond that. Its leader Xi Jinping recently spoke of (pdf) the need to “accelerate the construction of the digital economy,” including by shaping its international rules. That reflects Beijing’s broader strategy of setting the world’s technical standards—international norms that define how the global economy operates.

A key way for Beijing to elevate its role in international trade and global financial markets is to “internationalize” the renminbi, the yuan’s official name. That means increasing the yuan’s share of global transactions and currency reserves, both of which are currently dominated by the US dollar. Challenging the greenback’s dominance would also help shield Beijing from US sanctions.

But here’s the rub: the digital yuan will struggle to gain traction worldwide so long as the yuan isn’t widely used in the global financial system. Though the thinking in China is that the digital yuan could help internationalize the yuan by offering a new and efficient way for countries to settle cross-border payments, it isn’t technology that pushes people to use a currency. What would ultimately draw users to the yuan is confidence that the currency is stable, freely convertible, and backed by a sound, transparent economy.

Short of drastically reforming the yuan and lifting all currency controls, some experts have suggested setting a special discounted exchange rate for the digital yuan in order to attract more users in the short term.

This idea is laid out in a recent article (link in Chinese) by Ju Jiandong, a professor of finance at Beijing’s Tsinghua University. In order to undercut Swift, the world’s primary system for cross-border transactions that itself is dominated by the US dollar, Ju writes, China can initially subsidize transactions with a preferential exchange rate on the digital platform, giving “certain conversion discounts to companies or individuals who purchase digital renminbi for payment and settlement…to increase the demand for digital renminbi.”

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https://qz.com/1937703/china-could-subsidize-its-digital-renminbi-currency/?utm_source=YPL