WITH 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 City selected late last year to try China’s digital currency, officially called eCNY. She downloaded an app, received a gift of 200 yuan (US $ 30) from the government, and bought books. The app’s display showed a traditional banknote and its balance, which had gone down when it was purchased. “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 covered by a corresponding amount that is deposited with the People’s Bank of China. Just as the central bank issues every paper yuan in circulation in China and stands behind it, 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, processing around $ 67 billion in transactions last year, nearly 400 times more than America (see Figure 1). More than half a million people have already got their hands on itCNYin court proceedings, so to speak, since last year. China’s central bank is studying 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 curb the dominance of 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 global notoriety.
Inside China, however, many economists and bankers are far less optimistic. The design of the eCNYDue to the nature of the Chinese economic system, 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 state can keep track of people’s spending in real time. It is not entirely wrong. For the central bank, however, this is 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. Likewise, every foreign exchange transaction in China takes place via the Chinese foreign exchange trading system. Either way, regulators can see how people are spending in real time. For mobile payments that do not affect the banking system, officials can request a record and, according to an industry insider, may soon request real-time reporting as well.
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.
A second bold claim about eCNY is that it will reshape monetary policy in China. According to this view, the central bank will, among other things, have more control over the money and program it so that it is used 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, attempts have been made to lower interest rates for small businesses and to provide cheaper funding to banks that provide such loans.
The eCNYOne could assume that this targeting will become more precise. But its design is such that its role is much more narrowly circumscribed. 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 a two-tier system in which the currency is issued to commercial banks, which in turn makes them available to the public. No interest is paid on eCNY. And it will likely put low ceilings on how much people can actually 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 eCNY. This would make it more difficult for banks to finance themselves and thus slow credit growth. 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.
One final bold claim is that eCNY will catapult the yuan into global status. However, that’s a misunderstanding why the yuan now only accounts for 2% of international payments, roughly the same as the Australian and Canadian dollars. When deciding which currencies to use, companies and investors around the world consider how easily they can make conversions to other currencies. how freely and widely they 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, as well as deep-seated doubts about its one-party political system, dull the yuan’s international pull. 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 The payment network instructs banks to credit accounts in one country and debit them in another country. 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 At least meet the authorities’ original goal of gaining a foothold for the central bank in the universe of digital payments? Probably, but not a giant. After the eCNY During the Shenzhen trial, Ms. Lu said she would use it for some payments, but that Alipay and WeChat are far more convenient as they join much broader commercial and social messaging networks. Mr. Liu of the China Financial Reform Institute expects others to come to the same conclusion. In three years’ time he predicts that 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. For example, other countries may not try to model their digital currencies along the same lines. The caution with which China’s authorities proceed with the eCNYIf nothing else, this suggests how disruptive the technology could be if not constrained. ■