The facts: China could become the world’s first country to introduce a state-backed digital currency. The People’s Bank of China on September 19 announced its digital currency was ready for launch, although the central bank did not say when the virtual money would become available. The DECP (Digital Currency Electronic Payment) will be exchangeable for one renminbi (RMB) and be distributed by state-owned banks and possibly digital payments firms like Alipay and WeChat. Users will buy DCEP, store them in a digital wallet and trade them instantly for goods and services.
What to watch: A number of central banks – notably those in Sweden and Lithuania – are working on digital versions of their paper money, but none appear to be as far advanced as the People’s Bank of China. Chinese officials hope the DCEP will help internationalize the country’s currency, a pressing goal as many fear that China could be excluded from the SWIFT international payments system if US-China relations sour further. In that event, China would need its own international digital payments system.
China is trying to establish itself as a leader in payments technology and is intent on becoming the first country to launch a digital currency. Such a move would be a step forward in payments technology as it would usher in benefits like instant clearing and even offline payments. But it would not banish many of the problems currently holding the RMB back from more use globally. Even if it becomes more convenient to clear payments in RMB, the economic reasons to do so could still be limited. For one, much of China’s financial market is still not open to foreigners and property rights remain fragile.
MERICS analysis: “The launch of the digital RMB might marginally increase the Chinese currency’s international popularity, but it will not lead to an overnight surge in RMB usage,” says MERICS expert Maximilian Kaernfelt. “The Chinese central bank also knows more RMB usage could lead to the RMB appreciating against the dollar and pose a risk for domestic employment. As nice as launching the first central bank-backed digital currency would be, there are also some good reasons to wait.”
Media coverage and sources:
This short analysis first appeared in the September 24 issue of MERICS China Briefing.