China's digital yuan won't be replacing the US dollar

China’s digital yuan won’t be replacing the US dollar. (Photo by FRED DUFOUR / AFP)

China’s digital yuan won’t be replacing the US dollar

  • Apparently, China’s digital yuan was never meant to challenge the US dollar’s status as the international reserve currency
  • If anything, the development of digital currencies may help facilitate use in cross-border payments

Observers following the story might have assumed that China’s experimental digital yuan is designed to replace the US dollar’s global dominance. Former governor of the People’s Bank of China, Xiaochuan Zhou, cleared the air on potential misunderstandings regarding the country’s push for its digital sovereign currency.  He clarified that currency internationalization depends more on the opening up of financial policies and reform of the financial system, rather than on technology.

In short, China has never intended to replace the US dollar as the preferred international payment currency. Instead, the development of a digital yuan may help facilitate its usage in cross-border payments. “Also, the digital currency electronic payment system has been jointly developed by commercial banks, telecoms companies, and several major third-party payment companies, and is not meant to fulfill the role played by third-party payments. We are in the same boat,” Zhou said.

According to a report by the Global Times,  Zhou said in a keynote speech at the Tsinghua PBCSF Global Finance Forum in Beijing that media reports on the digital yuan, known as e-CNY or Digital Currency Electronic Payment (DCEP), especially in foreign media coverage, tend to give rise to some misguided understandings.

To date, China appears to be at the forefront as the first major central bank to issue a digital version of its currency, seeking to keep up with – and maintain control of – a rapidly digitizing economy. Trials and tests are underway in several cities, including Hong Kong, which is in talks with China to expand cross-border testing of the digital yuan.

Zhou said the DCEP project, primarily built on modernizing the domestic payment system, envisions raising efficiency and reducing costs, and serving as a bridge to retail payments in particular. To a certain extent, efforts to modernize and digitize the yuan’s payment system would help in increasing the yuan’s status as an international curency. 

However, Zhou clarified that the yuan’s internationalization is contingent upon the country’s institutional and policy choices, along with its reform and opening-up progress. In fact, China’s decision will not push the US Federal Reserve to rush its own digital currency project, its chairman Jerome Powell emphasized recently

Global competition is underway over the last few years to define the future of money. The aim is to address the flaws of currency’s traditional forms. Physical cash is a nuisance for transactions at a distance, and bank deposits are vulnerable to crises. To that end, many nation-states are now exploring the central bank digital currency option.