The balance could tip sharply in China’s favour if Beijing starts forcing other governments to make payments in e-yuan for trade and development projects. Already there are plans to use DCEP in the Beijing 2022 Winter Olympic Games and throughout the various Olympic venues.
When the mouthpiece of China’s Communist Party tells you not to worry, there’s only one sensible thing to do: start worrying.
In an attempt to allay growing international fears about China’s new digital currency, the e-yuan, the Global Times earlier this month carried an article headed “China’s digital yuan trials are completely irrelevant to geopolitics”. The paper accused some foreign media outlets of “jumping to the conclusion that the Chinese government deems the issue and control of sovereign digital currency as a “new battlefield of national competition”. It emphasises that the world shouldn’t worry as “the trials are simply part of an unstoppable trend of monetary and financial development”. In reality, of course, there is growing evidence that China is pursuing global dominance in financial technology.
So what are these trials all about? China’s central bank, the People’s Bank of China (PBOC), is developing a digital version of the yuan that it intends will replace its physical currency. The project goes by the name Digital Currency Electronics Payment (DCEP) and is not just a technical experiment—it’s a giant leap forward in the CCP’s control and influence in both its domestic and international power.
Electronic payments, of course, have been going on for several years. Along with millions of others, whenever I pay at the checkout at my local supermarket or for the fuel for my car at our local petrol station, I simply point my smartphone at the terminal and that’s it. Job done. No more do I use pieces of paper or coins (all possibly contaminated with Covid) for payment. In London, electronic payment advanced one step further this year when the ubiquitous Amazon opened new grocery stores without any cashiers. When you enter the store through a gate which opens when you scan an Amazon QR code on your smartphone, you walk in, grab what you want and walk out. That’s it. Cashless and cashierless. Payment for everything you have purchased will have been debited from your linked bank account.
Digital payments are also well entrenched in Indian households following the major catalyst in digitising India, demonetisation, by Prime Minister Narendra Modi in 2016. The number of digital payments last year was on average 22.42 per capita, with a total value of transactions made through mobile banking calculated to be Rs 29.5 trillion, a huge rise year on year. Increased penetration of smart service applications and digital technologies are the primary contributors to this enormous growth, with the Unified Payments Interface volume doubling year on year.
China has become an almost cashless society in the past few years. In 2020, cashless transactions amounted to 320 trillion yuan (US$49 trillion), accounting for every four out of five payment transactions. According to Statista, a leading provider of market and consumer data, there were 853 million mobile payment users in China last year, more than half the population. Currently, this vast e-payments market is dominated by two huge private companies, Ant Group (Alipay) and Tencent (WeChat Pay), which are estimated to have a world-wide active user base of around 1.9 billion.
So why does Beijing wish to add yet another payment system, DCEP, when the country is already hurtling towards a near total cashless society? The answer goes to the core of President Xi Jinping’s autocratic government: control. Unlike other e-payment systems, DCEP will be centralised and state-run. Beijing will be able to monitor how money is spent in real time, and have the same controls over DCEP as with the yuan. When I use my smartphone to pay, it’s the embedded credit card in my digital wallet which does the work. At the end of the month, my accrued spending is then automatically paid from my bank account and the credit card balance returns to zero. With DCEP, no such third party is involved. The PBOC issues the e-yuan, the central bank’s digital currency, directly into a digital wallet and its status as legal tender is guaranteed by the Chinese state.
In trials conducted in Shenzhen, Suzhou, Xiong’an, and Chengdu since April last year, users have been able to withdraw e-yuan via ATM machines directly on to their smartphone e-wallets. Then they pay for items by holding their smartphone app close to an e-yuan point-of-sale device. Because the e-yuan is legal tender, no merchant can refuse to accept it and will therefore be obliged to install e-yuan terminals and payment systems when the currency is formally launched. The same is not the case for other e-payment systems in China, such as Alipay or WeChat Pay, which merchants are at liberty to refuse. For users, the e-yuan is just like cash. If there’s no internet connection, users can still transfer money even to each other by using a near-field technology rather like Bluetooth. They simply transfer money phone to phone, just as they exchange notes or coins, even in no-signal areas such as remote rural villages or aeroplanes.
Some commentators have wrongly compared the e-yuan to a cryptocurrency like Bitcoin, when they are actually worlds apart. In fact, DCEP is the antithesis of Bitcoin. The Bitcoin is based on a “distributed ledger” technology, blockchain, which sucks financial transactions into an opaque system outside the control and oversight of central banks. The value of Bitcoin lies in its decentralisation nature and isolation from the financial system. The ultimate goal of all cryptocurrencies, and there are currently more than 7,800 in existence, is the separation of money and state. By comparison, DCEP will give the PBOC the power to scrutinise all of its citizens and companies, including foreign companies, all of the time. In other words, while in the US cryptocurrencies are steeped in the language of libertarianism, in China the DCEP is tied up in the Communist party’s drive to maintain control over society and the economy, reinforcing the existing surveillance state.
In being able to track all transactions at the individual level at all times with no anonymity, Beijing claims that DCEP will allow it to combat such things as money laundering, corruption and any electronic criminal activity, such as the financing of terrorism. Such scrutiny is the normal function of central banks, but what is different in China is who is scrutinised. In Xi Jinping’s mind, the definition of a terrorist includes the CCP’s political opponents. But if China plans to turn the yuan into a truly global currency and rival the US dollar by pushing for its adoption in cross border transactions and settlements, will this lack of anonymity cause alarm among its trading partners?
Possibly, but there are strong indications that Beijing is pressing hard for the international use of its new digital currency. In January this year it agreed to form a joint venture with SWIFT, the Belgium-based system for cross-border payments, in a move that observers say is aimed at promoting use of the e-yuan. This is a step in the bigger goal of challenging the dominance of the US dollar in international trade settlement. The current IMF figures speak for themselves. Currently, 60% of global foreign exchange reserves are held in US dollars, compared with just 4% for the yuan, while the US dollar had a 38% share as a global payments currency in January this year, compared to the yuan’s 2%.
But this balance could tip sharply in China’s favour if Beijing starts forcing other governments to make payments in e-yuan for trade and development projects. Already there are plans to use DCEP in the Beijing 2022 Winter Olympic Games and throughout the various Olympic venues. The well-established Belt and Road Initiative also gives Beijing an oven-ready means to break the US monetary sovereignty and turn the yuan into a truly global currency to rival the US dollar.
It was during the Tang dynasty that China invented banknotes. Back then, paper money was little more than an IOU which became known as “flying cash”, because of its tendency to blow away. It is quite likely that by the next generation, all cash as we now know it will have been blown away by digital currency, only to be displayed in museums as items of curiosity. There is no little irony that, supercharged by a pandemic for which it is responsible, China is in the vanguard to replace a system it gave the world 15 centuries ago.
John Dobson is a former British diplomat, who also worked in UK Prime Minister John Major’s office between 1995 and 1998.