Back in 2020, China’s Central Bank announced plans to begin rolling out a digital Yuan currency. At the time, there was talk of this currency overtaking the US Dollar in crucial financial transactions around the world.
Over the last decade or so, there has been a lot of talk about digital currency, driven in part by the popularity of cryptocurrencies such as Bitcoin. As a result of this, and due in part to concerns over China’s economy following the global pandemic, China has placed a strong emphasis on reforms in order to boost the worldwide standing of its currency.
Investors and markets around the world met this news with trepidation. Cryptocurrency is renowned for its volatility, and although China’s digital Yuan would not be the same, there were concerns that it would have a knock on effect on trade and global markets as the currency was rolled out.
Years later, we’re now heading for H2 2024, so what implications, if any, does this CBDC (Central Bank Digital Currency) have on financial markets around the globe?
What is the Digital Yuan?
The Digital Yuan/e-CNY was launched by China as an alternative to digital cryptocurrencies such as Bitcoin. It is the Chinese version of a central bank digital currency, meaning that China’s central bank plays a key role in assigning individual accounts to any individuals who happen to use the currency.
The Digital Yuan is essentially a retail central bank digital currency which is sent directly to individuals as opposed to a wholesale version which is designed to interact with other central banks and similar organizations.
The currency is designed to provide an alternative/replacement for cash, just like other forms of Crypto. Because of this, the currency does not yield any interest. It is also linked 1:1 with The Yuan, which is China’s domestic currency.
Like other forms of digital currency, the e-CNY is accepted by certain merchants around China and has been implemented in a number of major public transportation systems in cities around the country, including Beijing and Shanghai. In fact, the currency has gained such prominence, that during the Winter Olympic Games, it was one of three accepted payment methods.
A Safer Alternative to Crypto
Make no mistake about it, financial institutions and large banking organizations do not like crypto. In fact, they hate it. It isn’t regulated, there are security concerns, and the cryptocurrency market is renowned for its volatility and instability.
So, then, if banks, including China’s central bank, dislike crypto, why would they try to roll out a digital currency? Well, while there are plenty of reasons, primarily it boils down to the fact that the Digital Yuan is much safer and more secure than private cryptocurrencies.
CBDCs are designed to provide a number of advantages, including things such as:
- Increasing financial inclusion
- Reducing transaction costs
- Enhancing payment efficiency by removing the need for financial intermediaries
- Enabling central banks to maintain more control over monetary policy
- Allowing central banks to respond quicker and more efficiently to economic challenges
China is famously not a fan of crypto. It has tried to ban Bitcoin on numerous occasions so, although not specifically stated, the launch of the Digital Yuan was likely a response in part to Bitcoin’s growing popularity, and a big to nip the issue in the bud nice and early.
Another reason why the currency is considered by many to be a safer alternative is the fact that it offers stability. Bitcoin’s price is determined solely by market determinations. The markets set the price, which is why it has seen such enormous volatility over the last couple of years. In 2022 for example, Bitcoin crashed by -64%, it’s lowest price since the markets crashed in 2020.
On the other side of the coin (digital, that is) China’s Yuan is semi-pegged with the United States Dollar in a trading range. This helps add stability, though there are concerns that long-term returns may be muted in comparison to the risk. Basically, investors are concerned that the returns may not exceed the risk, I.E higher risk, lower reward.
What Implications for the Financial Markets?
So, now that we know a little more about the Digital Yuan, we’ll now look at how it may be impacting the financial markets, and what it could mean in the near future.
Since its pilot scheme was rolled out in 2020, the Digital Yuan has gradually gained traction, not only in China, but around the world too. Indeed, it is China’s intention to internationalize this currency so that it can be used around the globe.
Payment volumes have steadily ticked upwards, and at this point last year, they had reached $250 Billion.
China already has a fairly strong and robust digital payment ecosystem, but since the PBOC (People’s Bank of China) began collaborating with a number of leading tech platforms including WeChat Pay and Alipay, the currency’s popularity has really increased. Not only that, but the technology supporting the currency could potentially help other countries wishing to launch a similar currency. Should this be the case, China would become a key provider of essential infrastructure.
The primary financial implication, however, has to be the currency’s role in Project M-Bridge.
Project M-Bridge is a collaboration with the BIS (Bank for International Settlements), along with a number of other central banks, particularly those in the UAE and Saudi Arabia. The project’s goal is to produce platforms which facilitate cross-border payments utilizing CBDCs. Due to this collaboration, China is hoping to position the Digital Yuan as a primary currency in worldwide finance and essentially challenge the supremacy of the United States Dollar in international trade. Needless to say, America will be watching very closely.
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