Some 5,000 people in Shenzhen saw their phones light up in October with news they had won a digital “red envelope” worth 200 renminbi (RMB) ($30). One in six citizens had taken part in a lottery for free money, paid out in the Chinese central bank’s new digital currency, Digital Currency/Electronic Payment (DECP). China is in the vanguard of governments trying to catch up with online payments operators by putting virtual currencies into circulation. The People’s Bank of China (PBoC) says this will make the RMB more popular around the globe. But the real incentive for Beijing seems to be something else – data about citizens’ habits.
Beijing does want to accelerate the international use of its currency. Given the downward spiral of U.S.-China relations, U.S. financial sanctions against Chinese banks and restrictions on access to the SWIFT global payments system are no longer unthinkable. This would be a huge blow, as most of China’s cross-border transactions are settled in U.S. dollars. Only about 2 percent of international transactions cleared on SWIFT are settled in RMB and China’s CIPS payment system is still tiny, about 0.3 percent the size of SWIFT. A global RMB would allow China’s companies to pay – and be paid – around the world independently of the dollar.
For officials in Beijing, Iran is the precedent for what can befall dollar-dependent countries disliked by the United States. In 2012, the country was subjected to U.S. financial sanctions, including the blocking of Iranian banks from using SWIFT. Stagflation and economic recession quickly put Iran under serious economic pressure. To sustain employment and cushion its export sector, Tehran was forced to devalue its currency. Economic growth returned, but Iran’s external purchasing power was significantly reduced. As unlikely as similar U.S. moves against China remain, it is not surprising China wants to insure itself by reducing its reliance on the dollar.
China Finance, a journal run by the PBoC, in September published a commentary arguing for digitalization of the RMB to break the global monopoly of the dollar. And two years ago, Fan Yifei, deputy governor of the PBOC, said the digital currency, then still in development, would help RMB internationalization. But such statements defy logic as they imply that the reason for the relative unpopularity of the RMB is due to its not yet having been digitalized. Are we to believe that the enormous discrepancy between China’s share of the global economy and its share of global payments will close once digitalization is complete?
No, the weights holding down the old physical RMB will be just as heavy for its digital iteration. Beijing restricts foreign access to RMB-denominated investments and maintains capital controls on outwards investment. These and other restrictions serve China’s economic model well. They provide stability and give the government oversight and control over the economy – crucially, over employment. If the United States were to ever to warm to the idea of financial sanctions against China, Beijing would have to reverse some of these policies to foster international use of the RMB. A digital currency per se is not lure enough to do this.
Beijing’s questionable talk of internationalizing the RMB shouldn’t distract from a real domestic advantage a digital currency promises the government. The DCEP rollout can be seen an attempt by the PBoC to regain some control of a digital payments system run by the private financial sector. After numerous legislative attempts, Beijing has now opted for technological means. The digital currency is an ideal vehicle to ensure financial security and stability the way Xi Jinping understands it – through technology controlled by the party-state. And it could turn the PBoC into the focal point of the resulting financial data ecosystem.
Mass adoption of the digital RMB would mark a fundamental shift away from commercial digital payment systems like WeChat Pay and Alipay to the central bank. More than 80 percent of China 900 million mobile internet users use their mobile phones for transactions. Chinese shoppers and merchants represent almost half the world’s digital wallet users. Alibaba and Tencent control 94 percent of this market and cleared $50 trillion in transactions in 2019. The resulting data flows allow valuable analyses of metadata and inferences about individual (shopping) behavior. Alibaba recently launched a new business model called “New Retail.”
Perhaps not surprisingly, the digital RMB is not fundamentally different from the existing digital payments systems. Once the new virtual currency is fully integrated into the existing banking infrastructure, China’s central bank will act as an issuer and lender of new RMB units in a two-tier system. DECP does offer some technological improvements like allowing unregistered small transactions, a novel accounting method, and slightly better security. But these are so marginal – and even conservative compared to the possibilities of blockchain – that the question arises why China’s central bank felt the need to launch a digital currency at all.
The answer might lie below the surface. Firstly, the new UTXO accounting model in combination with the two-tier distribution system will ensure that, unlike on WeChat Pay and Alipay, only the central bank knows the sender and the receiver of any transaction, unless both communicate on the same platform. Secondly, changes to legal and technical parameters mean that every transaction can be stopped more easily and undisclosed. As the Alibaba-owned South China Morning Post newspaper put it: “There will be no transaction that regulatory authorities will not be able to see – cash flows will be completely traceable.”
Should the digital RMB be broadly adopted, Beijing will exercise unprecedented financial insight and real-time monetary and economic oversight. This will no doubt benefit fiscal policy, tax collection, and fighting fraud – but also subject citizens to potentially menacing digital social governance.
Even with the Shenzhen lottery, the digital RMB has changed hands (or smartphones) about 3 million times, while WeChat booked a billion transactions – a day. But the DECP is a sign Beijing has a more burning issue than internationalizing the RMB – renegotiating the terms of economic and political power with China’s tech giants.
Maximilian Kärnfelt and Kai von Carnap are analysts at MERICS in Berlin, Germany.