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Could the digital renminbi change banking and e-commerce in China?


Chi LO


The digital renminbi is unlikely challenge the US dollar’s global dominance any time soon because of the Chinese currency’s structural limitations. However, it may prompt changes in China’s technology and financial sectors that could indirectly enhance the international competitiveness of Chinese banks and potentially disrupt the now US-centric global financial system. Feeling the digital renminbi’s potential threat, the US might fight back by discouraging or banning US institutions from using the renminbi and its related instruments and systems. However, sanctions could backfire on the US by incentivising other countries to look for alternatives to the US dollar, including the renminbi, to reduce the risks around their USD exposure.

Controlled anonymity

At this stage of the development of central bank digital currencies (CBDC), China’s digital renminbi has a unique feature: ‘controlled anonymity’. This differs from the ‘untraceable anonymity’ of private-sector cryptocurrencies. Controlled anonymity works through a two-tier system:
  1. The PBoC issues and redeems digital renminbi with selected institutions, including major banks and online payment services providers; these have to deposit an equivalent amount of renminbi at the central bank for every unit of digital yuan they receive.
  2. These institutions will issue and redeem digital yuan with the public (their clients) who have to keep an equivalent amount of renminbi at the corresponding institutions for every digital yuan they receive. The 100%-backing condition matches is e-payment customers are already doing for cashless payments by smartphone.
In contrast with CBDC plans by other central banks, Chinese users of digital renminbi do not have a digital renminbi account with the central bank. This saves the PBoC from the hassle of having to run retail-banking operations, which is outside of its remit. In this setup, authorised institutions see only those digital transactions that they handle – for example, when their clients deposit, withdraw or transfer funds using digital renminbi. This is the ‘anonymity’ part. However, the PBoC sees the transactions of all authorised institutions and it does not share this information with the public. This is the ‘controlled’ part.

A domestically oriented setup

The two-tier system and controlled anonymity are likely to be the central features of the digital renminbi when it is rolled out nationally. The current stage of development is domestically oriented; there is no intention to expand its usage beyond China’s borders. The government will likely roll out the digital yuan in different phases and ways. It has started paying the salaries of selected public servants and their pensions in digital yuan. There are discussions on using digital renminbi to pay government subsidies, such as transfers to low-income households and subsidies to firms, and for procurement. Beijing could even require firms and individuals to pay taxes and government fees in digital yuan. It is worth noting that by replacing physical notes and coins, the digital yuan can save the PBoC billions of renminbi in printing costs and the outlays for circulating new currency and retiring worn and damaged currency. A far-reaching implication of the digital renminbi that has not been discussed much is its potential to change the rules of the game for China’s banks and big tech firms and their e-commerce platforms.

Banks versus fintech platforms

The rapid rise of digital giants has significantly changed the transaction behaviour of households and companies. Consumers can now access a large array of products via digital financial supermarkets with a level of convenience unavailable even in many advanced economies. E-commerce groups can market products, and even lend to millions of small firms and households unable to obtain bank loans, more effectively than the big banks.
Big tech companies can do so because they have an edge in capturing changing demand patterns and online transaction behaviour. Unlike banks, they are able to amass reviews of products and services, changes in tastes and preferences, product return rates and other (marketing) information. This big data allows big tech to process credit applications, distribute loans and collect repayments more efficiently and cheaply than the banks. Indeed, fintech platforms have been able to build ecosystems replicating most banking functions and providing novel services at lower cost and with greater accessibility and better service quality.

Information asymmetry versus controlled anonymity

The information asymmetry problem described above worries the authorities in China and abroad. The concern is that the big tech might abuse these advantages. Already, banks in China have refused to lend to the private sector because they lack information on the creditworthiness of individuals and small and medium-sized companies (SMEs). The digital renminbi may help resolve this problem and improve the efficiency of the financial system. The PBoC could use aggregate data on revenue growth, changes in spending and transaction/payment patterns, etc. to estimate the creditworthiness of different types of borrowers, assign them credit scores and share that with the banks at low or even no cost. This would significantly reduce the information edge of e-commerce and fintech platforms. It could make it easier for banks to lend more to SMEs and the private sector and go a long way to improving China’s capital allocation and strengthen its banks’ – international –  competitiveness.
Any views expressed here are those of the author as of the date of publication, are based on available information, and are subject to change without notice. Individual portfolio management teams may hold different views and may take different investment decisions for different clients. This document does not constitute investment advice. The value of investments and the income they generate may go down as well as up and it is possible that investors will not recover their initial outlay. Past performance is no guarantee for future returns. Investing in emerging markets, or specialised or restricted sectors is likely to be subject to a higher-than-average volatility due to a high degree of concentration, greater uncertainty because less information is available, there is less liquidity or due to greater sensitivity to changes in market conditions (social, political and economic conditions). Some emerging markets offer less security than the majority of international developed markets. For this reason, services for portfolio transactions, liquidation and conservation on behalf of funds invested in emerging markets may carry greater risk.

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