With CBDC fever subsiding, the digital yuan no longer looks like such a game-changer. To be sure, it is being adopted domestically, but tellingly, more so in areas where the government has full control – like the salaries of civil service workers.
As a wholesale CBDC, the e-CNY may have a cross-border future – but that idea remains theoretical for now. The m-Bridge project that involves the PBOC, Hong Kong Monetary Authority, Bank of Thailand and the UAE central bank is a pilot. Whether it would work as a feasible alternative to traditional correspondent banking remains to be seen.
A vexing challenge for the e-CNY is that it appears like a solution in search of a problem. China has already addressed its most pressing financial inclusion needs with existing e-payment methods. While one could argue that the digital yuan might introduce more competition into mobile payments, market forces already are doing so, from PayPal to American Express.
Meanwhile, while many countries grumble about U.S. dominance of the international financial system, it is unclear if major economies would be keen to join an alternative system running on China’s digital rails. The renminbi would probably first need to become a bigger overall player in international finance.
Limited domestic traction
Dig into the data on China’s money supply, and one finds that the e-CNY represented just 0.13% of cash in circulation and central bank reserves as of December 2022 (M0), and just .005% of M2 - cash, checking deposits, and other types of deposits that are readily convertible to cash.
The strongest uptake of the e-CNY is in China’s large state economy. There, the government has the ability to incentivize uptake of the Chinese CBDC easily. For instance, local governments and state-owned enterprises (SOEs) are beginning to pay wages in e-CNY, hoping that it will eventually translate to wider adoption in the consumer market.
Some local governments in China have begun paying salaries in e-CNY. For instance, Changshu, a city in Jiangsu Province, paid more than 4,900 public sector and SOE employees with the digital yuan from June to September 2022. From this month, the city will pay all its civil servants and SOE employees in full with the digital yuan.
While certain local governments may want to signal their support for a key central government initiative, the private sector and consumers are another story. Indeed, neither has shown much enthusiasm for the e-CNY yet, as existing digital payments are already among the world’s most advanced, even if the long-running Alipay/Tenpay duopoly has stifled competition to some degree.
In January 2022, the PBOC said that the e-CNY wallet had 261 million users in China, which equals more than 20% of the population. That sounds like a lot – until we look at the actual transaction value, about US$13.8 billion in total.
In comparison, in 2020, Alipay was processing about US$1.6 trillion in transactions every month, according to an Ant Group filing ahead of its planned IPO.
Cross-border aspirations
Compared to its domestic applications, the e-CNY’s cross-border use potential has received much more attention – and it is also even more difficult to achieve at scale. On the one hand, the digital infrastructure to facilitate cross-border CBDC transactions remains a work in progress. Most countries have not even launched digital fiat currencies. Those that have besides China, such as Cambodia and the Bahamas, are not major economies.
To be sure, it is possible that the e-CNY could be used in wholesale cross-border transactions. Case in point: The m-Bridge project aims to build a common platform for efficient, low-cost cross-border digital payments. During an m-Bridge pilot last year, the e-CNY was the most issued and actively transacted token. 11.8 million in e-CNY was issued in the August-September 2022 testing period, while it was used in 72 overall payment and foreign exchange transactions.
“You can also adopt these existing traditional payment systems such as RTGS [real-time gross settlement] or FPS [Faster Payment System], so that central banks or monetary authorities can issue their own CBDC on mBridge without establishing their own CBDC system,” Mu Changchun, director of the PBOC’s Digital Currency Research Institute, said at Hong Kong’s 2022 FinTech Week.
Yet for m-Bridge to be successful beyond the pilot stage, it would need to offer significant improvements over existing cross-border payments, which, without involving CBDCs, can already be made in real time. Moreover, despite the usual claims of challenging SWIFT, trust remains paramount. Would ,m-Bridge be viewed as sufficiently secure for other countries to issue their own CBDCs on it? And how many central banks would be comfortable with relinquishing control over currency issuance and instead using a platform like m-Bridge?
These are questions worth pondering.
Digitization is not a panacea
Ultimately, the same factors that limit the traditional Chinese fiat currency’s internationalization apply to the e-CNY. Capital and foreign exchange controls do not become a lesser concern simply because the renminbi has been digitized. Digitization does not change the fundamentals.
While China would like the renminbi to have a larger role in the global financial system, it also recognizes the enhanced security that comes with a self-contained financial ecosystem. Beijing remains wary of trading a greater role in international finance for reduced control over currency fluctuations and capital flows. The perceived risks to systemic financial stability are simply too great, especially in a precarious geopolitical environment.
There may come a time when Chinese policymakers decide the risks are worth taking. However, until then – and unless Beijing returns to the path of financial liberalization it set out on in the early 2010s – the digital yuan will have limited cross-border growth prospects.