W.There are a few Lu Qingqing, a 24-year-old office worker, taps her cell phone and jumps into the monetary future. She was one of 50,000 people in Shenzhen selected for trial against China late last year digital currency, called eCNY. She downloaded an app, received 200 yuan (US $ 30) from the government, and went shopping to buy books. The app’s display showed a traditional banknote. “It felt like real money,” she says.
Legally, it’s as real as cash. All the money in one eCNY The app, which is offered by one of six commercial banks, is secured by a corresponding deposit with the People’s Bank of China. Just as the central bank is behind every paper yuan, it also guarantees eCNY. For example, if the commercial bank that made Ms. Lu’s digital wallet went bust, her eCNY– linked to your personal identity number – would be transferred to a new wallet.
Central banks around the world are considering issuing digital versions of notes and coins. While China won’t be the first country (this honor goes to the Bahamas), it is the main starting place. It is the world leader in mobile payments (see Figure 1). More than half a million people have already received eCNY in trials since last year. China’s central bank is exploring how to spread it overseas. Historian Niall Ferguson has urged America to face the risk of letting China “shape the money of the future”.
China’s digital currency was first designed to contain the major wireless carriers. Three bold claims are now being made: It will dramatically improve China’s surveillance capabilities. that it will allow the state to have far more control over money; and that it will challenge the dollar for notoriety.
Inside China, however, many economists are far less optimistic. The design of the eCNYand the nature of the Chinese economic system mean that any of these claims are unlikely to materialize anytime soon. “The digital yuan is not magic, so we don’t expect magic,” said Gary Liu of the China Financial Reform Institute in Shanghai.
Start with the first claim that digitization offers unmatched surveillance capabilities so that the government can keep track of all spending. It is not entirely wrong. But it’s a limited gain compared to its existing powers.
Most mobile payments today use a bank card tied to users’ accounts with Alipay or WeChat. These must be routed via NetsUnion, a central clearing platform. Foreign exchange transactions also take place in the Chinese foreign exchange trading system. Either way, regulators can see how much people are spending in real time. For mobile payments that don’t touch banks, officials can ask for a record and, according to an industry insider, may ask for real-time reporting soon.
The result is that even without an eCNYAside from old-fashioned cash, regulators no longer have any real blind spots. And as long as millions of elderly citizens don’t like to pay with smartphones, the government will not allow cash to leak.
The second bold claim about eCNY is that it will reshape monetary policy in China. According to this view, the central bank can program money for specific purposes and at predefined times. However, this underestimates both what the central bank can already do and what the eCNY will let it do it.
China already manages both the money supply and interest rates for various sectors. For example, since 2015, hundreds of billions of yuan have been spent building affordable housing. More recently, banks have been instructed to lower interest rates for small businesses.
The eCNYOne could assume that targeting will become more precise. But its design will rewrite its role. The central bank will only replace a small portion of the base money, known as M.0, with eCNYThe rest of the money supply remains undisturbed (see Figure 2). It will distribute eCNY through commercial banks, who in turn will make it available to the public. No interest is paid on eCNY. And it will likely put low ceilings for how much people can hold.
Admittedly, the central bank can expand the e in good timeCNYRole. However, the limitations are there for a reason. The government is careful about undermining the financial system. She doesn’t want savers to switch en masse from bank deposits to eCNYwhich would make it more difficult for banks to finance themselves. In addition, few serious economists in Beijing like the idea of a 100% eCNY Amount of money where the government could have direct control over how banks lend. “We don’t want to go back to central planning. That would be a mistake, ”said Yu Yongding, a former advisor to the central bank.
The final bold claim is that eCNY will catapult the yuan into global status. However, that’s a misunderstanding why it now accounts for only 2% of international payments, roughly the same as the Canadian dollar. When deciding which currencies to use, companies and investors consider how easily they can convert to other currencies. how freely you can invest it; and whether they trust the legal systems of the issuing countries. China’s insistence on capital controls far tighter than any other major economy and deep-seated doubts about its political system dull the yuan’s appeal. The limiting factors are politics and politics, not technology.
Even the technological case for eCNY is far from clear. When companies send money to and from China, they are already using currency in a digital format: electronic messages on the FAST Payment network Instruct banks to credit accounts in one country and debit accounts in another. What is slowing things down is compliance with capital controls in China and international regulations like anti-money laundering.
The eCNY will not eliminate such controls, and the headquarters in Belgium FAST The system, which connects more than 11,000 financial institutions, is likely to remain the most efficient channel for exchanging payment information across borders. “Even in the long term FAST will remain indispensable, ”says Liu Dongmin of the Chinese Academy of Social Sciences.
The three more radical claims about it cannot be materialized, but the eCNY fulfill the original goal of gaining a foothold for the central bank in the universe of digital payments? Probably, but not a giant. After the eCNY At the Shenzhen court hearing, Ms. Lu said she would use it for some payments, but Alipay and WeChat are far more convenient as they join commercial and social messaging networks. Mr. Liu of the China Financial Reform Institute expects others to agree. He predicts that in three years the eCNY will account for less than 5% of mobile payments.
Western governments and central bankers considering their own digital currencies may wonder whether the outcome of the eCNY The experiment will contain all of the lessons for her. But China is unusual in so many ways – from its protected financial system to intricate capital controls to the size of its mobile payments – that its experience could prove to be unique. And other countries are sure to implement different designs for their digital currencies. Still, China’s caution towards the eCNYIf nothing else, this suggests how disruptive the technology could be if not constrained. ■
A version of this article was published online on May 3, 2021
This article appeared in the Finance & Economics section of the print edition under the heading “The New Yuan: Very Similar to the Old Yuan”.