How has the global economy been affected by Chinese digital currencies?

1. China’s digital currency could be the
future of money – but does it threaten
global stability?
China is making promising progress with testing its digital
yuan currency. It has announced the success of a pilot in
Suzhou City, near Shanghai in eastern China, where 181,000
consumers were given ¥55 (£6) of free money in digital wallets
to spend at participating outlets in the Double Fifth shopping
festival between May 1 and 5.
This was part of a bigger test by the People’s Bank of China
targeting 500,000 consumers in 11 Chinese regions since
April. For those eligible, there is a straightforward app to
download which gives them a wallet. Using this to make
purchases in thousands of participating stores, they receive
discounts. For more news, click this
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The digital yuan is a version of the normal Chinese currency
deployed on a blockchain, which is the tamper-proof online
ledger technology that underpins digital coins like bitcoin and
ethereum.However, this blockchain is permissioned, meaning
the People’s Bank decides who can use it.
The latest round of tests is ten times the size of the original
round that took place in autumn 2020. China has also been
trialling the digital yuan cross-border between Hong Kong and
neighbouring Shenzhen,and is developing a platform for
making the currency internationally viable that involves
Thailand, UAE and the Bank of International Settlements
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2. Unlike cryptocurrencies such as bitcoin, the currency is also
backed by a government. This means that issuance of digital
yuan is the same as issuance of cash in circulation, making it
just as secure. It gives the government better control over the
money supply, since unlike with cash, officials can see all the
transactions taking place at any given time.
Three dangers
Lots of central banks have been looking at developing digital
currencies. Some such as Japan and South Korea are not far
behind the Chinese.The EU is signalling that a digital
euro could be four or five years away.
For the laggards, there are several dangers. The first is around
international payments. Most transactions between different
currencies currently use the US dollar as an intermediary,
via the SWIFT international banking protocol. This means
considerable demand for the US dollar, which brings
advantages such as enabling the US government to borrow
more cheaply. In 2019, for example, China alone exported
goods worth US$134 billion (£96 billion). For more news,
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3. Transactions using digital yuan won’t need SWIFT or the
dollar, with implications for dollar usage in international
trade. As many as 120 countries have China as their biggest
trade partner, and many question settling in dollars as it adds
the unnecessary financial risk of adverse exchange rate
movements.China says it is not trying to replace the dollar
with the digital yuan, and that the “goal is to allow the market
to choose”how to settle international transactions
A second danger is that if central
banks don’t meet the demand for
digital money, market forces will.
Paper money was invented in China
during the Song Dynasty in the 11th
century. But it is fast becoming
redundant. Contactless credit cards
have become ubiquitous during the
pandemic. Digital money is better
still as it costs less to use
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Third, countries that fail to embrace
digital currencies could find their
central banks losingcontrol over
monetary policy to cryptocurrencies
– be it decentralised initiatives like bitcoin or centralised ones
like Facebook’s forthcomingdiem currency. In other words, if
these non-sovereign coins become widely used for payment
purposes, central banks will find it harder to manage their
economies by setting interest rates or changing the money
supply. Of course, it is possible to ban cryptocurrencies but
this stands in the way of progress and all the advantages they
bring.
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The digital yuan is happening amid heightened
tensions between China and the US and Europe. This clearly

4. makes it a worrying time to give the Chinese first-mover
advantage over this new type of currency.
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Incidentally, sanctions such as those recently imposed on
Chinese officials over human rights concerns will be much
easier to bypass if and when the digital yuan is up and
running. There could well be calls to sanction those usingthe
currency as a result, which raises numerous questions about
viability and consequences that could be discussed on another
occasion.
But given how much is at stake, it is vital that the US, EU and
UK begin testing their own digital currencies urgently.
Blockchain is reinventing the way we conduct payments, and
the risks of being left behind are too great to ignore.
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