Q: Mark, China has become a global leader in embracing central bank digital currencies (CBDC). What’s been driving this?
A: Mobile payments are deeply entrenched in China, with the vast majority going through the duopoly of Alipay, which is part of the Alibaba group, and Tencent’s WeChat Pay. Like other central banks, the People’s Bank of China (PBoC) believes it has a responsibility to provide a stable payment system as use of physical cash declines, but in China there’s this extra layer of discomfort among the leadership about so much power being held by those two private companies.
Q: When will China’s CBDC launch?
A: They’ve been working on a digital currency since 2014 and pilot projects have been running across Chinese cities since 2020 but we’re not expecting it to be widely available across the whole country anytime soon. The central bank official in charge of the initiative, Mu Changchun, said recently that there’s no timetable, though the next milestone is likely to be a limited rollout to coincide with the Winter Olympics next February that foreign visitors and athletes could participate in.
Q: What do we know about how China's CDBC will work?
A: We know more than we did a few months ago, thanks to a new PBoC white paper on the issue. We knew before that the eCNY would be a two-tier structure, with the PBoC issuing to commercial banks, who will then provide it to consumers via digital wallets. The PBoC has now clarified that these CBDC balances will be central bank liabilities, rather than those of wallet issuers. Also, the PBoC now says there will be limits on wallet and transaction size, which addresses the risk we’d previously discussed of funds draining from regular deposit accounts at commercial banks.
Q: What would the launch of a CBDC mean for how economic policy is formulated in China?
A: The PBoC says it won’t pay interest on the eCNY, so that rules out its use as a tool of monetary policy. But there are “programmable” aspects of CBDCs worth thinking about for the future – things like built-in conditions limiting what they’re spent on, or a time limit to incentivise spending, so that you’re able to design targeted spending and lending programmes with much greater precision.
Q: One strand of discussion about China's CBDC is its potential to drive renminbi internationalisation and threaten the dollar's role in the global financial system. Is it going to be so significant?
A: There’s a lot of fanciful coverage about the eCNY having a first-mover advantage to challenge the dollar’s dominance, but none of the structural forces that have held back the renminbi’s adoption abroad would be addressed by the introduction of eCNY. Large-scale global use requires foreigners to both want and be able to buy and sell Chinese financial assets in large volumes at will. But that would require removing capital controls and losing the ability to directly control the renminbi exchange rate – looking at the broader context of official priorities that’s highly unlikely.
Published 21 July, 2021