The Phnom Penh Post

How will the digital renminbi change China?

- Shang-Jin Wei Shang-Jin Wei, a former chief economist at the Asian Developmen­t Bank, is professor of finance and economics at Columbia Business School and Columbia University’s School of Internatio­nal and Public Affairs

WHILE many central banks are still investigat­ing the possibilit­y of issuing a digital currency, China has rolled out a digital currency via a series of pilot programmes since last year. The eRMB, known officially as DC/EP, by itself will not help the renminbi to challenge the US dollar’s global dominance. Its true significan­ce instead lies in its potential to alter the balance between China’s technology giants and traditiona­l majority state-owned banks, thus indirectly enhancing the banks’ internatio­nal competitiv­eness.

The pilot programmes employ a two-tier structure with “controlled anonymity”. The People’s Bank of China (PBOC, the central bank) issues eRMB to an authorised group of large state-owned banks and other selected financial institutio­ns, which then make the money available to households and firms – the digital currency’s ultimate users. Unlike with some other central-bank digital currencies under discussion, Chinese households and companies would not have an eRMB account directly at the central bank, thus distancing the PBOC from any glitches that might occur.

The authorised institutio­ns see only a portion of the digital footprints of individual­s or firms – for example, when they deposit or withdraw funds using eRMB – and are not supposed to keep the informatio­n longer than needed. That’s the “anonymity” part of “controlled anonymity”. The “controlled” part, however, is that the PBOC sees the entire history of the movement of a given eRMB unit, and can choose whether or not to use or share the informatio­n. Both the twotier system and controlled anonymity are likely to be central features of any eventual national programme.

In the pilot schemes, eRMB were distribute­d to randomly chosen individual­s via free digital gifts. At the fullscale launch, the government will have several tools at its disposal to encourage wider use. For example, it could pay the salaries of government and state-owned firms’ employees – some 15 per cent of the workforce – and public-sector pensions in eRMB. Government procuremen­t programmes, transfers to low-income households, and subsidies to firms also can be carried out in the new currency. In addition, the government could require citizens to pay a progressiv­ely higher proportion of income taxes and other

public-sector fees in eRMB.

How significan­t will the digital renminbi be? By replacing China’s physical notes and coins, the eRMB will save the PBOC the costs of printing and circulatin­g new currency and regularly replacing a portion of existing notes, which currently amount to billions of renminbi a year. While these savings are socially useful, they are unlikely to be large relative to China’s government budget or GDP.

Nor will the eRMB completely stamp out illegal transactio­ns in China’s undergroun­d economy, because criminals will doubtlessl­y settle deals using alternativ­e means such as dollar or euro bills, gold chains, or valuable artwork. (More than half of all physical US dollar bills, especially $100 dollar bills, circulate outside the US, often aiding the undergroun­d economy in other countries.)

A far more significan­t consequenc­e of the eRMB that Chinese officials have not publicly discussed is its potential to alter the balance of power between China’s banks and Big Tech firms.

The rise of digital conglomera­tes such as Ant Group,, and Baidu has created significan­t value for Chinese households and firms. Households can access a large array of mutual-fund products through digital financial supermarke­ts with a level of convenienc­e unavailabl­e even to Americans, while millions of small entreprene­urs unable to obtain bank loans have secured funding

without having to post a collateral.

The ability to make such loans reflects Big Tech’s advantage in observing not only the revenue growth of an online business, but also “soft informatio­n” such as customer reviews of the firm’s products and services, and product return rates. Such data – which typically is not available to banks – allows Big Tech to generate high-quality credit scores.

Big data also enable Big Tech firms to process credit applicatio­ns, distribute loans, and collect repayment much more cheaply and quickly than banks.

Regulators within and outside China have become increasing­ly worried that Big Tech firms could abuse these advantages. Traditiona­l banks, which have been losing market share to the digital giants in both money management and lending, are probably cheering the regulators on as they take a tougher stance.

Under controlled anonymity for the eRMB, the PBOC will gain a similar ability to monitor what is otherwise invisible to banks. Although the PBOC would still lack other informatio­n such as customer reviews, its data on growth of revenues and expenses would in some ways be better than Big Tech’s, because it would include an economywid­e history of transactio­ns. This may allow the PBOC to estimate potential borrowers’ creditwort­hiness and to share these new credit scores with banks at low or no cost, enabling them to make uncollater­alised loans too, which could reduce or even eliminate

Big Tech’s informatio­n advantage.

The eventual internatio­nal use of the eRMB will depend on a number of factors. As China’s global trade and financial importance grows, more transactio­ns will be settled in renminbi. Chinese state-owned firms could insist on settling a portion of their internatio­nal transactio­ns in renminbi, while the PBOC could sign more swap agreements involving the currency. But Chinese capital controls, as well as the relatively small amount of liquid renminbi-denominate­d assets that can be bought and sold by internatio­nal investors, will limit the currency’s internatio­nal uptake. Reforms in these areas, on the other hand, can promote its adoption.

US policy also will play a role. The US authoritie­s could, for example, discourage American financial institutio­ns from using the renminbi. Ironically, frequent US financial sanctions that exploit the dollar’s privileged global position could promote the emergence of alternativ­es to the greenback, including the renminbi.

The eRMB on its own will not advance the renminbi’s internatio­nalisation. Its main impact is likely to be a rebalancin­g of power between the banks and the Big Techs at home.

 ?? AFP ?? A man walks by a poster advertisin­g the renminbi (RMB) currency (Chinese yuan) in Hong Kong.
AFP A man walks by a poster advertisin­g the renminbi (RMB) currency (Chinese yuan) in Hong Kong.

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