Op/Ed by Chris Devonshire-Ellis and Dorcas Wong
China’s ‘digital yuan’ has raised much interest since it was announced, with our firm receiving numerous inquiries from around the world as to when it will be available for purchase and trade. We wrote about this over on our Belt & Road portal Silk Road Briefing in the context of the new variant of the currency impacting later China trade at the expense of the US dollar.
It is not insignificant that Russia has also legalized the use of cryptocurrencies and that the ‘digital ruble’ will come into being from January 1 next year just over four months away. Russia has also announced the first cryptocurrency bank loan with Moscow-based Expobank making an undisclosed loan using Waves crypto tokens as collateral for the agreement earlier this week. Such transactions will become more common as security, banking protocols, and digital stability technologies are all developed.
Meanwhile, our predictions over the decline of the use of the US dollar also appear to be coming true – its use in China-Russia transactions has declined from 90 percent in 2015 to half that today, an annual decline of 10 percent per annum. At that rate, come 2025, all China-Russia transactions will be conducted either in Euros or via the respective digital currencies. These are real changes and they are happening now. Given that in 2018 China surpassed the United States as the nation with the greatest share of global trade, it is hardly surprising that the use of the US dollar will begin to diminish. That process has already begun. Therefore, it is no surprise that interest in the digital yuan as a tradable currency is growing.
Digital yuan trials
The digital yuan (known officially as the DC/EP – Digital Currency Electronic Payment) is not available for trading at this time and is currently only in its early stages of trial. There are reports that the digital yuan has been trialed in four cities – Shenzhen, Suzhou, Chengdu, Xiong’an – and some commercial entities, such as Didi Chuxing, the taxi service, since April 2020.
MOFCOM’S digital currency plan
However, the government seems to be moving quickly on this, and just recently, on August 12 this year, MOFCOM announced a major expansion of its digital currency trials (though no start date was announced for this expansion). The plan is roughly as follows:
- The People’s Bank of China will formulate implementation policies, with Shenzhen, Chengdu, Suzhou, Xiong’an New Area, and the Beijing 2022 Winter Olympics sites (which include a number of venues in Hebei and Heilongjiang) to hold increasing volumes of trials.
- These trials will then be expanded to other regions in Shanghai and the Yangtze River Delta, Guangdong Province, Tianjin, Hong Kong, and Macao.
- Additional regions in Central and Western China will follow suit if the trial can meet specific requirements.
The full plan (in Chinese only) can be accessed here.
This indicates that the trial period will last until at least 2023 and possibly longer if glitches or upgrades need to be made to the digital processing technology – a likely scenario as security and functionality issues develop as will available technology advancements. It is also reasonable to expect that the currency will only be issued via Chinese commercial banks.
The Hinrich Foundation have also issued a report on the digital yuan that states, “There are a number of key features that need to be decided upon that will shape the nature of a CBDC [Central Bank Digital Currency] in any jurisdiction: to whom is it available; the degree of anonymity; whether there will be peer-to-peer transferability or whether all transactions will go through the central bank; the degree to which CBDC replaces physical cash; and the limits placed on its issuance.”
So, for the short term, overseas buyers will not be able to access the digital yuan. The date to look for in terms of how trialing the currency has rendered it fit for commercial, and potentially wider, even international use, appears to be at the earliest, sometime in 2024 or 2025.
Then things could get really interesting.
China Briefing is written and produced by Dezan Shira & Associates. The practice assists foreign investors into China and has done so since 1992 through offices in Beijing, Tianjin, Dalian, Qingdao, Shanghai, Hangzhou, Ningbo, Suzhou, Guangzhou, Dongguan, Zhongshan, Shenzhen, and Hong Kong.
Please contact the firm for assistance in China at [email protected]. We also maintain offices assisting foreign investors in Vietnam, Indonesia, Singapore, The Philippines, Malaysia, Thailand, United States, and Italy, in addition to our practices in India and Russia and our trade research facilities along the Belt & Road Initiative.