Paper Money was first used in China during the Tang Dynasty. Fourteen Centuries later, China is giving a new spin to the concept of currency itself.
Now how the project could transform the International Financial System and give new currency to the meaning of money. China is already number one in the world for mobile payment penetration, with 790 million people expected to be using such payments this year.
Chinese consumers logged more than 60.5 billion mobile payment transactions in 2018, with spending at 277.4 trillion yuan (US$39 trillion) a huge leap for what was once a mostly cash economy.
A government backed digital currency, however, is expected to take things to another level.
Beijing has already begun trials of its digital currency electronic payment (DCEP). If successful, it could transform the international financial system, some analysts said. The trials aim to cover a broad spectrum of use cases, ranging from retail to transport and salary payment.
The digital currency is being piloted in four Chinese Cities; Shenzhen, Suzhou, Xiong’an and Chengdu.
According to Ms Shirley Yu, Asia Fellow at the Harvard Kennedy School, the digital yuan was used to pay up to half of government workers’ travel expenses in May.
China’s four major national banks and three major telecommunications companies are involved in the trial, as are American companies such as McDonald’s, Starbucks and Subway.
The second phase of the trial is expected to take place during the 2022 Winter Olympics in Beijing. Mobile transactions made up 80 per cent of payments made in China last year. Screenshots of the digital yuan app circulating on social media reveal its similarities to these digital wallets.
The DCEP, however, is more than a digital wallet or an electronic payment solution. It is a digital form of fiat money, or currency whose value is backed by the government. It is pegged 1:1 to the paper renminbi, and is just like having paper money.
Of course, digital currency itself is not a new thing.
And the growth of the crypto sector has sparked concerns that digital coins could be used for money laundering. Experts however have said that virtual currency could also tackle a different type of “dirty money” as Chinese authorities found out during the COVID-19 Outbreak.
Billions of dollars in cash was collected from Hubei province, particularly from the pandemic’s centre in Wuhan, during the outbreak and sanitised.
Some of the money had to be disposed of, however, to avoid spreading the virus through banknotes and coins. If that cash had been digital yuan, said Mr Shi Yuntao from software consultancy ThoughtWorks China, there would have been no such worries.
Another selling point for consumers, especially those not based in China, is that the system does not need an e-wallet or a Chinese bank account.
Ben Cavender of the China Market Research Group sees potential for the digital currency in the Belt & Road Initiative, China’s ambitious goal to link together development and infrastructure projects in more than 60 Countries.
“There are a lot of consumers and small business owners in these markets, who may not have access to a bank. They may not have a way to change currency, or they may be in an economy where the value of their own economy might fluctuate. And so a lot of these people might be interested in using a digital currency like this because they can more easily control their business relationship with China. They’re not going to be losing money on foreign exchange, and it’s going to be much cheaper for them to make transactions.”
In time, the yuan may increasingly be internationalised, but experts are divided on whether it can challenge the hegemony of the US dollar.
Mr Jasper Lee of social trading network eToro said he believes that the digital yuan could eventually have a presence in the global markets, and also as a storage of value. This, he said, could eventually challenge the dominance of the US dollar.
The road will be long though.
Mr Shi pointed out that according to a 2016 survey by the Bank for International Settlements, the yuan’s share of international currency transactions was 4.3 per cent, compared with 88 per cent for the US dollar and 32 per cent for the euro.
“There’s a long way to go to catch up even to the euro, the closest competitor to the US dollar,” said Mr Shi.
Mr Cavender said he expects the US dollar to remain a safe haven during tough times.
“But over the longer term, it’s very clear that there is going to be pressure to move more towards these state-backed digital currencies, whether it’s China’s or a handful of others that might end up being created over the next few years.
“At that point you are going to see probably less of a reliance on the US dollar as a hard currency or as a reserve currency, because there are going to be these other options which are steady and very easy to track and trace.”
The outlook for China’s digital currency could also be tied in with the changing role of China on the international stage.
As Ms Yu of the Harvard Kennedy School put it: “The DCEP itself cannot become a true global currency just because it’s a digital currency, unless the renminbi is recognised as a true global currency.
So fundamentally, it is about the financial status of the nation and its currency status, and globally, that will push this currency towards its usage and its adaptation globally.”