Global Implications of China’s Digital Currency
By Erik Wernberg-Tougaard
China´s digital currency (DCEP) has the potential to impact global capital flows and pose an alternative to traditional money transfer systems. It will also allow the Chinese government to track transactions, fight corruption and earmark financial stimuli. All companies operating in and with China need to pay attention to its development.
China is already the world´s biggest digital economy and likely to be the first nation to have a functioning, digital currency. The currency is controlled and issued by The People´s Bank of China (PBOC), who already rolled out testing in several major cities and provinces last year. An estimated $17 million has been handed out in just under a year of testing. Initially announced to be fully commercially implemented by the 2022 Olympics, it now looks like it may already be launched within this year.
An international game changer
With the deteriorating relationship between China and US, it is not unthinkable that the US will impose financial sanctions on China’s use of the SWIFT system. This is of course something that is of great concern to the Chinese government, and something that a popular and international digital currency can help mitigate. By having a global RMB, Chinese companies – and foreign companies, for that matter – will be able to settle transactions internationally independently of the US dollar.
Certain countries along the Belt & Road initiative may see it beneficial to use the digital currency over the dollar for transactions, since it will be faster, cheaper, and easier to use, then the slow and complex SWIFT system. China is naturally interested in having insights and control over cross borders transactions for a large part of the world´s population, but it will also be a challenge with cross border activities. In a recent, and clever move, SWIFT entered into a joint venture with the Chinese digital currency research institute. According to Chinese state media, it shows the importance for SWIFT to gear up to new, digital payment modes, but it also presents the DCEP with a helping hand to cross borders.
DCEP will mean more central control
The central control of DCEP means that the Chinese government will be able to track money flows better. This will help authorities control corruption and diminish money laundering, illegal financing and counterfeiting. While that spells good news for international companies who also wish to avoid issues with corruption, it also comes serious privacy concerns too, and every company and individual operating in and with China should be aware about the implications.
The central tracking will also allow the government to have a far more detailed understanding of the status of the Chinese economy, which will give policymakers better insights and tools to tailor monetary policies. For example, stimulus packages can be released directly to the consumers and it can earmark the resources to be spent only on its intention, such as necessities or food.
More popular than USD?
According to the PBOC the digital currency has the potential to make the Chinese currency (RMB) more popular around the world. Today, most cross-border transactions are settled in US dollars, and with less than 2% of all transactions cleared on the SWIFT system being RMB, the Chinese currency still has a clear disadvantage. Experts suggest that though it may not be in the near future, the digital currency may be able to help change that. Because the DCEP is not tied to a bank account, but can be considered “cash on your phone”, it means that populations without bank accounts, but with access to a mobile phone would be able to use the DCEP. That could be attractive for many countries along the New Silk Route.
While the quick development of the DCEP poses many possibilities it still remains a fact that the Chinese government holds a tight grip on capital flows and the exchange rate. That will continue to make the RMB less attractive to international companies. For companies already operating in China, it will be crucial to follow the regulation and roll out locally both in terms of international money flows but also with regards to the local adaptation and use.
Are you interested in asking questions about the DCEP directly to expert? Then join our next event on April 8th, when we dive further into the global implications of China´s digital currency.
