Doubling Down on the Digital Yuan

  • Biden administration surveying the Chinese digital yuan more closely, as a perceived threat to dollar dominance  
  • Despite being the world’s second largest economy, the Chinese yuan only represents some 2% of global reserve currency, but a shift would require a serious makeover of China’s financial policies and capital controls
The Biden administration is stepping up scrutiny of China’s plans for a digital yuan, with some officials concerned the move could kick off a long-term bid to topple the dollar as the world’s reserve currency.
The digital yuan, which could see a wider roll out at the 2022 Winter Olympics in Beijing, is also spurring the U.S. to consider creating a digital dollar.
But instead of challenging dollar dominance and neutralizing sanctions, the digital yuan appears more geopolitically significant as leverage over multinational companies and governments that want access to China’s 1.4 billion consumers.
Since China has the ability to monitor transactions involving the digital currency, it may be easier to retaliate against anyone who rebuffs Beijing on sensitive issues like Taiwan, Xinjiang and Hong Kong.
While that level of control may boost growth in the world’s second-biggest economy, it also risks spooking companies and governments already wary of China’s track record on intellectual property rights, economic coercion and rule of law.
The digital yuan would serve as a back-up to Ant Group’s Alipay and Tencent’s (-1.27%) WeChat Pay, which together make up 98% of the mobile payments market in China.
Last month Mu Changchun, director of the People’s Bank of China’s Digital Currency Research Institute said the electronic yuan has the “highest level of privacy protection” and the central bank wouldn’t directly know the identity of users, but the government could get that information from financial institutions in cases of suspected illegal activity.
Chinese policymakers have also repeatedly emphasized that the digital yuan isn’t meant to challenge the dollar, with People’s Bank of China Deputy Governor Li Bo saying last weekend the motivation for the e-CNY as being primarily for domestic use.
Then again Beijing has also said that the Lianoning, originally classified as a training ship, was never intended to be run as an aircraft carrier.
The Chinese currency now makes up about 2% of global foreign exchange reserves compared with nearly 60% for the U.S. dollar, and most of Beijing’s trade and loans in its ambitious Belt-and-Road Initiative are disbursed in dollars.
Any serious challenge to the dollar’s position as the world’s reserve currency would also require significant policy changes from China, including lifting capital controls that help the Communist Party keep a lid on sudden outflows that could trigger a financial crisis.
Even if the digital yuan could be transacted more cheaply outside of U.S.-controlled global payment systems, it’s unclear if anyone would use it.
China began research on the digital yuan back in 2014, right after the price of Bitcoin surged from US$13.40 to over US$1,000, raising the risk that digital currencies could impact Beijing’s control of monetary policy.
Beijing has begun technical testing with Hong Kong for cross-border payments, and is working with Thailand and the United Arab Emirates on real-time foreign exchange settlements.
Authorities are also studying how the digital yuan can be combined with 5G networks (no, they do not cause coronavirus) and the internet of things.

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