WHO'S AFRAID OF THE DIGITAL RMB?
China’s pilot of e-renminbi has implications for international trade and world order
Not having a smartphone in China can be a real handicap. Wads of red RMB100 notes, with the ubiquitous picture of Mao Zedong, are no longer commonly seen changing hands, as mobile apps like AliPay and WeChat Pay have become the default payment mode. With a usage rate of 80%, it is around double that of Denmark which has the next highest mobile payment penetration rate. Despite being a developing country with large swathes of its population remaining in rural poverty, China’s increasingly cashless society is enough to leave visitors from the Global North feeling that their own countries are backward and undeveloped.
Now, the world’s second largest economy is taking this momentum further by issuing its own digital currency: A new frontier now largely contested by private, unregulated cryptocurrencies like bitcoin and perhaps,
Facebook’s Libra, which faced some backlash when its ambitions were made known. Since April, the People’s Bank of China (PBOC) has piloted its own “digital renminbi” or “e-renminbi” (e-RMB). It is now part of the monetary system of Shenzhen, Suzhou, Chengdu and Xiong’an, a satellite city of Beijing.
According to Xinhua News Agency, more than 20 firms are now involved in the trials including giant telecom and tech firms such as China Telecom, China Mobile and Hua
wei Technologies. As part of the trials, four large state-owned banks have issued 50% of the monthly transport subsidies to staff in Suzhou’s Xiangcheng district in e-RMB. The news agency reported e-RMB could be fully rolled out by 2021.
At a basic level, issuing a digital currency appears to be an attempt to adapt to consumer behaviour — if more and more Chinese are paying for goods and services with their phones, it makes sense to issue currency in digital form. “I use mobile payment for everything. Some of the [stalls] are not even willing to take cash from me,” says DBS economist Nathan Chow, who recalls having to pay street vendors in even Tier-2 and Tier-3 cities this way as well.
The popularity of mobile payment is evident. From almost nothing in 2013, total mobile payment transactions in China hit RMB190.5 trillion ($37.4 trillion) in 2018. Conversely, physical cash circulation in China is declining. M0 (all physical currency including coinage) to GDP ratio fell to just 7.8% in 2019 from between 10% and 15% in the decade to 2010, making China one of the least cash intensive economies in the world. Its M0 to M2 (cash, checking deposits and time deposits) ratio is just 5% compared to 24% in the US, 10% in Japan and almost 60% in India.
“I would expect that [contactless payment] would boom further as the health outbreak we are having right now highlights exactly the need for contactless payment, because they require less physical interaction,” predicts Chow.
Some serious money is betting on emerging payment systems. On June 22, for example, online payment business Checkout.com received US$150 million ($209 million) in Series B funding on the back of a 250% y-o-y increase in transactions as of May, tripling in revenue to become one of the world’s most valuable FinTech firms worth US$5.5 billion.
In the name of sovereignty
As for e-RMB, it is not merely for better convenience. It is also seen as helping to further the growth of China’s financial markets. One out of five Chinese citizens remains unbanked and e-RMB can help change that. FinTech firms and other financial institutions can presumably ride on the new demand from this untapped customer base. “e-RMB could potentially reach 225 million Chinese people who do not have bank accounts and who are mostly in rural areas — potentially pulling them in to boost national consumption,” says Anthony Chan, chief Asia investment strategist at Union Bancaire Privee.
Other experts believe that there are other reasons why China has launched e-RMB. Dylan MH Loh, assistant professor at the public policy and global affairs programme at Nanyang Technological University (NTU), believes that e-RMB can be a form of capital control.
Sudden capital outflows — triggered by US-China trade tensions — could have destabilising effects on economies. “Beijing is well aware of the risks posed by sudden and large monetary outflows,” says Loh, who notes that capital outflows reached an estimated US$1 trillion in 2015 — a third of China’s foreign reserves.
While cash admittedly constitutes of only a small proportion of China’s total capital stock of US$94.9 trillion, this is still a considerable sum of US$4 trillion in cash circulating.
Now, should e-RMB become more prevalent as a means of currency exchange, China would then be able to track and manage large capital outflows in the form of liquid cash. Loh estimates that transactions over RMB100,000 are traceable by the PBOC, allowing it to better manage destabilising outflows of funds in digital form.
Suan Teck Kin, UOB’s executive director in global economics and markets research, puts forward another reason for e-RMB: to continue with Chinese President Xi Jinping’s ongoing campaign against corruption and fraud. As transactions made in e-RMB are traceable by the PBOC, unusual fund flows can be easily de
tected. Funds can also be more easily sent directly to intended recipients further down the hierarchy, bypassing mid-level apparatchiks.
NTU’s Loh sees another reason for the launch of e-RMB: with better ability to monitor how and where people spend, the Chinese government can have better data to construct a citizen’s social credit score which is a measurement of “trustworthiness”.
Other critics, however, have pointed out that the traceability of e-RMB could help the Chinese government strengthen its domestic political control and clamp down on political dissent. “The PBOC will have a panopticon view of all transactions in the digital yuan and potentially, of all transactions in systems that leverage its technology, strengthening its information advantage,” write Aditi Kumar and Eric Rosenbach of the Harvard Kennedy School’s Belfer Centre in Foreign Affairs.
PBOC’s currency head Mu Changchun has sought to allay these concerns. According to a Coindesk report, he said at a conference in Singapore: “We know the demand from the general public is to keep anonymity by using paper money and coins … we will give those people who demand it anonymity in their transactions. But at the same time, we will keep the balance between the ‘controllable anonymity’ and anti-money laundering, CTF (counter-terrorist financing), and also tax issues, online gambling and any electronic criminal activities.”
Now, given how the government support behind e-RMB can be ratcheted up, will popular payment apps such as Alipay and WeChat be eventually supplanted? UOB’s Suan does not believe so. For one, PBOC would need to become a payment provider itself and this function can be more efficiently outsourced to friendly firms in the private sector. These FinTech firms, as well as China’s commercial banks, will be responsible for storing e-RMB on top of facilitating day-to-day transactions through e-wallets that resemble Singapore’s PayNow e-payment function.
“China’s liberalised banking rules gave both
Alibaba and Tencent — the rough equivalent of Facebook and Amazon — banking licences. It was a bold and smart move to allow tech providers to become banks, and this came at the expense of their own state-owned lenders,” says Rich Turrin, former head of IBM’s banking risk technology team in China.
Not only has this improved access to unbanked populations across China, it has also enabled greater innovation in the e-payment sphere by allowing firms to compete to implement the best infrastructure for such a service.
PBOC’s priority is to uphold the state’s financial legitimacy to issue currency. While private cryptocurrencies now act more like private assets for speculation rather than an alternative to state-issued fiat currency per se, the initial goal of such currencies was a political one — to create an alternative parallel economy uncontrolled by the state, says Loh. For a regime that prioritises control, says Norton Rose Fulbright attorney Etelka Bogardi, the hypothetical risk of a privately-issued ßcurrency potentially threatening the circulation of RMB is viewed as a threat to the state’s ability to manage its finances.
China’s move to introduce e-RMB was first mooted back in 2014, around the time numerous initial coin offerings by private players were made and speculative fervour was strong. In September 2017, for the reason of fraud risks, such activities were banned, while e-RMB went ahead. “This has very strong political will behind it. They see an opportunity of being a global leader here,” says Andrew Polk, co-founder and head of economic research at Trivium China, a Beijing-based consultant, in an interview with Bloomberg.
A quote from a Chinese official cited by Kumar and Rosenbach in their Foreign Affairs piece best encapsulates this point. “If Libra is accepted by everyone and becomes a widely used payment tool, then after some time, it is entirely possible that it will develop into a global, super-sovereign currency. We need to plan ahead to protect our monetary sovereignty.”