By Don Weinland: China business and finance editor, The Economist, Shanghai
THE BUZZ around the e-CNY, China’s central-bank digital currency, has been loud. The country’s policymakers have been credited with leading a revolution in state-backed digital money starting in 2019. Many other central banks have followed China’s lead. But the development has all been local. The People’s Bank of China (PBoC), the central bank, has said next to nothing about using the digital currency abroad. In fact PBoC officials have emphasised that the current focus of e-CNY use is within China.
This has not stopped the speculation about it spreading abroad. Cryptocurrency and decentralised-finance specialists say it is only a matter of time before China expands trials into markets where the country does lots of trade. They also suggest that sanctions on Russia could speed up the process.
Xi Jinping, China’s president, and other senior leaders in the country view their reliance on the American-backed global financial system as a chronic weakness. America has demonstrated recently that it is willing to cut foreign banks off from the most important global financial messaging system, SWIFT, if they disobey its orders. In particular, in 2022 the Biden administration told SWIFT, which is based in Belgium, to stop doing business with several Russian banks after Vladimir Putin’s invasion of Ukraine. Leaders in Beijing can easily imagine similar sanctions being imposed on their banks if China dared at some point to invade Taiwan, the self-governing island it views as part of its sovereign territory.
Xi Jinping views reliance on the American-backed global financial system as a chronic weakness
The usefulness of the digital yuan in international markets is a hotly debated topic. Some experts have pointed out that, in theory, the e-CNY could be used to dodge the dollar system altogether. This is because its technology does not need SWIFT. And yet critics note that the long arm of American financial regulation would probably still succeed in persuading foreign bankers to stay away from a challenger currency from China if its usage for sanctions busting grew significantly. Even so, many people watching its development speculate that the e-CNY, which is both a currency and a payments system, will eventually be rolled out abroad for use in trade finance.Do not expect any big moves on this in 2023. China is still trying to keep covid-19 out of the country and, as a result, has become increasingly inward-looking. It is also still perfecting the e-CNY within China. In September 2022 several provinces were added to the trial programme. A national roll-out could pick up pace in 2023.
But there is still important global work to be done in the coming year. The initial deployment of China’s digital currency has spurred the development of a handful of payments platforms around the world, some of which are linked to the PBoC. China’s central bank, for example, joined a project with the central banks of Hong Kong, Thailand and the UAE that is developing a wholesale clearing system for cross-border payments called mBridge. Kakao, a South Korean tech group, is building a retail clearing platform called Klaytn. In Singapore, JPMorgan Chase, a bank, is partnering with Temasek, a state investment group, to build its own. When digital currencies such as the e-CNY start eyeing foreign markets, these platforms will be able to facilitate exchange between different jurisdictions.
That is no easy task. SWIFT has been around for ages. New systems must bridge huge technological and regulatory differences between countries. In 2023 many of these projects will begin to mature. Some will launch, laying the early groundwork needed for transactions in e-CNY—and other such central-bank digital currencies—in the years to come.■
Don Weinland: China business and finance editor, The Economist, Shanghai
This article appeared in the Finance section of the print edition of The World Ahead 2023 under the headline “Yuan for the money”