SupChina illustration by Derek Zheng
As Facebook’s planned payment system, Libra, flounders, China has become the first country to test an official digital currency that could make such financial transactions faster and easier in the future. But when will it actually launch?
The People’s Bank of China has initiated a pilot program to test the central-bank digital currency (CBDC) in four cities: Shenzhen, Suzhou, Chengdu, and Xiong’an, a satellite city of Beijing. The currency will be used in limited amounts, and as part of preparation for the 2022 Beijing Winter Olympics. Beginning this month, some Chinese government workers will receive a portion of their April salaries in the digital currency distributed through an app on their phones.
How will the digital currency differ from the yuan?
Hundreds of millions of people in China have already shifted away from cash to using smartphone apps such as WeChat and Alipay. An official digital currency will stem the risk of mobile phone payments if one of those commercial platforms goes bankrupt. It will also help China’s government track financial transactions, enabling it to better crack down on corruption, money laundering, and tax evasion.
The digital currency will be pegged to the yuan. Consumers and businesses will be able to exchange yuan in their bank accounts (and in their WeChat and Alipay wallets) for the digital currency and vice versa, but there will be no paper issue of CBDC.
Chinese state news media have argued a sovereign digital currency would also blunt the impact of international sanctions or threats of exclusion at a country or company level. A digital currency may “facilitate integration into globally traded currency markets with a reduced risk of politically inspired disruption… These two settlement systems — US dollar and China sovereign digital — may operate side by side or if need be, on a mutually exclusive basis,” read a recent China Daily opinion piece.
The People’s Bank of China has also said an official digital currency will safeguard foreign exchange sovereignty and boost global use of the yuan. The yuan makes up just 2 percent of global payments and reserves.
Last year, nearly 90 percent of international transactions were in U.S. dollars, and about 60 percent of all foreign exchange reserves in the world are in U.S. dollars, allowing the U.S. power over the global financial system and muscle to enforce sanctions.
China’s slow rush to digital money
China’s government wants this to change. In a speech last October, China’s leader, Xí Jìnpíng 习近平, said blockchain is an “important breakthrough in independent innovation of core technologies,” and that China should seize the opportunities for developing it.
Facebook’s plans to release Libra, a blockchain-based currency, may have spurred China’s creation of a digital currency, which its central bank has been researching since 2014.
“China is moving quickly to launch a similar idea in the coming months,” Facebook CEO Mark Zuckerberg told a U.S. House committee last October. “Libra is going to be backed mostly by dollars and I believe that it will extend America’s financial leadership around the world as well as our democratic values and oversight… If America doesn’t innovate, our financial leadership is not guaranteed.”
State news media reported that China has invited 19 retailers, including McDonald’s, Starbucks, and Subway, to trial the digital yuan. The Chinese government says any wider rollout of the digital currency will be very gradual, and has not released a timetable for an official launch.
The digital yuan will likely not challenge the U.S. dollar’s global influence anytime soon. Central bankers have said they aim to replace some of the coins and cash in circulation with the digital currency, a process that could take many years.
Related: Blockchain in China: Local is everything.