The rise of a Chinese digital currency
China has in fact been working on a digital currency since 2014. The PBoC launched such a currency last December. Called the Digital Currency Electronic Payment (DCEP), the work has involved the Big Four state banks and the Big Three telecoms companies in Shenzhen and Suzhou as pilots. Beijing has now added more cities – Chengdu and Xiong’an – to the experiment. This is normal practice before any policy initiatives are rolled out nationally.
Having a cryptocurrency can be seen as part of efforts to assert or boost dominance of the global reserve currency pool and advance foreign policy claims. A digital renminbi could disrupt the US status quo ability to pursue national interests by leveraging on the faith in and general acceptance of the US dollar. A Chinese crypto-renminbi could quickly challenge that dominance.
Climbing the global ladder
The creation of DCEP can be seen as part of President Xi Jinping’s ‘Chinese Dream’ to build out China’s global influence. A digital version could advance the renminbi’s internationalisation process and boost the Belt and Road Initiative (BRI) simultaneously.
China’s incentive to climb the global ladder is indeed strong. Since 2013, it has been in the top two as the world’s largest trading nation. There is a clear disconnect between the highest proportion of world trade going through China and trade’s denomination in US dollar.
To facilitate cross-border renminbi settlements and break the dominance of the US dollar payments system, the PBoC even set up China’s own international payments system in 2015. However, SWIFT data shows that the renminbi’s share of international payments was still only 1.9% in 2019. In addition, despite the IMF including the renminbi in its Special Drawing Rights basket in 2016, making it an official reserve currency, its share in total global reserves has been stagnant at under 2.0% (see exhibit 1).
To further push the international usage of the renminbi, China has undertaken numerous financial liberalisation efforts, including expanding the Stock Connect scheme, reforming the renminbi-US dollar fixing mechanism and establishing a Bond Connect scheme. Under the BRI, China would fund the expansion of the foreign trade network and international infrastructure projects. The huge sums lent and invested abroad mark a way to internationalise the currency.
Success has been partial. Only 14% of BRI trade and investment was denominated in renminbi in 2017. In most cases, countries used the US dollar as the funding currency, even though China was financing their trade and investment projects.
To accelerate and deepen the internationalisation efforts, China needs to create significant non-trade demand for the renminbi. For that to happen, the renminbi will have to fungible, among other fundamental conditions that it will have to fulfil.
Challenging, but not displacing the dollar
A crypto-renminbi could meet the fungibility condition. It could also make renminbi cross-border payments more convenient. This would enhance the renminbi as a tool for international trade settlement and invoicing, and as a store of value, and advance the Chinese Dream.
Arguably, the erosion of the basic functions of money (as a unit of account, a medium of exchange and a store of value) of the G3 currencies since the Global Financial Crisis has opened up a window of opportunity for the renminbi to challenge the world monetary order. Facebook’s Libra project might just have given China a push to jump the gun and avert a threat to China’s internationalisation efforts.
A Chinese digital currency will not undermine the US dollar’s dominance soon. Deep and liquid US capital markets, strong institutions and the rule of law will trump Chinese efforts at financial dominance in the medium term. Despite China’s rising economic clout, there is still little acceptance of the renminbi internationally. This speaks volumes about the technical and economic hurdles facing the currency.
China will have to sort out renminbi convertibility before it can push its internationalisation aspiration further. It will take time to sort out market distortions due to capital controls, a lack of transparency, governance problems and restrictions on foreign ownership of Chinese assets before the renminbi can displace the US dollar. But the digital renminbi’s challenge is real. It may serve as a catalyst for changes in China.
Any views expressed here are those of the author as of the date of publication, are based on available information, and are subject to change without notice. Individual portfolio management teams may hold different views and may take different investment decisions for different clients.
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 The Big Four banks are the Industrial and Commercial Bank of China, China Construction Bank, Bank of China and Agricultural Bank of China.
 The Big Three telecoms companies are China Telecom, China Mobile and China Unicom.
 See “Demystifying China’s Mega Trends: The Driving Forces That Will Shake Up China and the World”, Chi Lo, Emerald Publishing, chapter 10).