Is e-RMB a tool of trade and weapon of politics?

Much interest in e-RMB stems from the global implications of China issuing such a currency. A digital currency, observers speculate, could accelerate the internationalisation of the RMB and threaten the global hegemony of the US dollar. Beijing has sought greater global recognition for RMB since the aftermath of the Global Financial Crisis in 2008, successfully lobbying for RMB to be included as one of the five currencies in the basket forming IMF’s “Special Drawing Rights” (SDR) with the US dollar, pound sterling, euro and Japanese yen.

“No matter what happens, regardless of whatever obstacles we may face, China will resolutely pursue financial reforms and bring about the orderly internationalisation of the Renminbi,” declared Chinese Premier Li Keqiang at a September 2015 meeting with then UK Chancellor of the Exchequer George Osborne.

Former PBOC head Zhou Xiaochuan further comments that one of the goals for e-RMB is to facilitate cross-border payments for international financial institutions, using technology to realise the vision of an international RMB.

Such an objective has become all the more important as US-China relations reach their nadir. Fang Xinghai, vice-chairman of the China Securities Regulatory Commission (CSRC), has urged for quicker RMB internationalisation to prevent the weaponisation of the US dollar to solve domestic issues hurting the value of Chinese overseas investments. Such a move would also forestall US restrictions on global payments by Chinese firms, he says, pointing out that such restrictions have also hurt the prospects of Russian firms and financial institutions.

The option of dollar weaponisation is, according to Mizuho Bank head of economics and strategy Vishnu Varathan, irresistible to US politicians — especially in these uncertain times. Additionally, the US benefits from its dominance of the Society for Worldwide Interbank Financial Telecommunication (Swift), which facilitates the conduct of international payments. Since cutting off a country from this network would severely limit their ability to participate in international trade, Washington enjoys immense leverage over the economies of other states as well as a degree of oversight over financial flows to and from foreign countries. “The introduction of a digital RMB could reduce reliance on the US dollar, allowing the Chinese economy to be insulated from dollar weaponisation, and even US sanctions,” says NTU’s Loh.

Amid present US- China hostility, Beijing would benefit from a channel of economic transaction free from US supervision; e-RMB is also an alternative means of economic transaction should Washington seek to curtail its economic activities.

Conversely, e-RMB can help expand China’s economic influence by promoting the currency’s use both in its immediate neighbourhood and across its flagship Belt and Road Initiative (BRI). Though Suan of UOB believes that e-RMB will in its early days primarily be used for small-scale border trade between China and its neighbouring countries, the existence of schemes like the “Digital Silk Road” and Beijing’s aim to internationalise RMB could see it push for greater use overseas. Additionally, Loh speculates that China could potentially tighten currency rules for trade, necessitating the use of e-RMB in transactions.

“A crypto- renminbi ... could also make renminbi cross-border payments more convenient. This would enhance the renminbi as a tool for international trade settlement and invoicing, and as a store of value, and advance the Chinese Dream,” says BNP Paribas economist Chi Lo, referring to another of Xi’s grand visions.

China is already working with the Hong Kong SAR government to link their trade finance blockchains and is conducting research with the Thai government to investigate the possibility of using e- RMB for cross- border payments. Considering the archaic and cumbersome nature of trade finance today, e-RMB is likely to be part of a solution to create a more efficient trading process in future.

Naturally, this has led to fears that the global pre-eminence of the US dollar will be undermined; not only would this curtail the ability of the US to print “magic money” and act with the same degree of flexibility on the international stage, it could also find it more difficult to track overseas transactions since these may be taken in digital RMB instead. The US Senate Banking Committee has already begun hearings on a digital dollar to keep the greenback relevant; Loh and Bogardi both expect potential sanctions against e-RMB use should it come into vogue.

“Until now, Washington could take comfort in the fact that the US financial system was truly unrivalled. Now policymakers must decide how to protect it in an era when China — or even a private company, such as Facebook — can challenge American banks and payments infrastructure,” write Kumar and Rosenbach of Harvard.

Besides a digital dollar, they have also called on Washington to avoid reflexive and unilateral sanctions so as not to scare away potential users with less than stellar human rights records, as well as take the lead to set data-sharing agreements and use guidelines to prevent perceived abuses of financial data.

But even in digital form, RMB is unlikely to threaten the greenback’s preponderance any time soon. Bogardi points out that China’s maintenance of capital controls — which makes holding large amounts of RMB challenging — and the difficulty of financial markets in hedging RMB has weakened the “redback’s” case to replace the US dollar, which is used in 98% of the world’s export transactions. A heavily-controlled currency like RMB could restrict freedom of economic activity if it came into vogue.

“While Chinese policymakers seem interested in the internationalisation of the renminbi, they appear less interested in its liberalisation,” writes Citi’s managing director David Lubin in an op-ed for British security think tank Chatham House.

Still, there are security concerns should the region grow more reliant on e-RMB. Besides granting Beijing more economic leverage, adopting e-RMB could also be interpreted as a sign of support for China over the US, possibly forcing states to choose sides. “By stipulating that importers receive payment in the digital yuan, or requiring contractors for the real-world BRI to repay loans using it, China could both increase demand for its national currency and bring more users into a network that it can closely monitor,” add Kumar and Rosenbach.

Yet with the sheer size of the Chinese economy and the influence it has on the global economy, Loh predicts that e-RMB will continue to prove an attractive proposition for regional states. Despite long-running friendly ties with the US, regional partners and allies such as Singapore, Thailand and South Korea have all embraced the economic opportunity of the BRI. Even Washington’s “special friend” the UK signed up for the China-led Asian Infrastructure Investment Bank (AIIB) initiative. Despite a more polarised world, the sheer size and prowess of China’s economy could still see states buying into its future prosperity against Washington’s wishes.

Even if e-RMB cannot yet seriously challenge US dollar hegemony, at the very least, with China’s growing sphere of influence, a credible alternative for emerging economies is shaping up.