Sovereign virtual coin lets Beijing bolster oversight and boost currency abroad. China appears on track to launch a sovereign digital currency next year, becoming the first major country to do so, as Beijing aims to track money flows more closely and combat planned cryptocurrencies such as Facebook’s Libra.
With work completed on conducting research and setting standards for the virtual yuan, the next step involves choosing a region for a test launch, Fan Yifei, deputy governor of the People’s Bank of China, said at the end of November. A month earlier, former Chongqing Mayor Huang Qifan told a Shanghai forum that the PBOC was likely to be the world’s first central bank to launch a digital currency.
Digitizing the yuan should lighten the workload for banks by reducing cash circulation, but the move also lets Beijing tighten scrutiny of international transactions and promote the use of its currency on the global stage.
The virtual yuan additionally looks to serve as a preemptive strike against Libra, a cryptocurrency backed by major companies like Facebook that has Beijing worried both about capital outflows and about losing more ground to the dollar.
The digital yuan would circulate in much the same way as its physical counterpart, with the central bank issuing it to financial institutions — through which it would flow to individuals and businesses. It would not bear interest.
Blockchain, the distributed digital ledger technology that underpins cryptocurrencies such as bitcoin, has been floated as a likely basis for the virtual coin.
Zhou Xiaochuan, a former PBOC governor, indicated last month that he expected the virtual yuan to be focused on domestic use at first, citing retail as a sector ripe to enjoy the benefits of digital payments.
The yuan frequently exits China in the form of cash stashes, which often include money from off-the-books transactions. Reducing cash circulation with the digital yuan would help the government track the flow of funds and potentially prevent crimes such as money laundering.
Mobile payment platforms like Alipay and WeChat Pay — run by virtual mall operator Alibaba Group Holding and tech group Tencent Holdings, respectively — have already taken off in China. Counting bank transfers and other business-to-business transactions, the proportion of payments that has not yet made the leap to digital is seen at just 3% of the country’s total.
Even with the benefits already realized in the shift away from cash, the central bank has two key reasons to rush toward the virtual yuan.
Beijing wants to bolster oversight of the transfer of funds abroad. Many Chinese companies send more money overseas than regulations permit, and leading analysts estimate Beijing remains unaware of 5% to 10% of cross-border transactions. The virtual coin would help the government keep tabs on such transactions.
China also wants to get out ahead of Libra. The Facebook-led coin will be backed by a basket of real currencies such as the dollar, and Beijing fears an even worse capital outflow than bitcoin sparked in 2015 and 2016 without such backing. Moreover, the yuan’s absence from that basket could reinforce the dollar’s hegemony.
Chinese President Xi Jinping appears intent on using the digital coin to bolster the yuan’s presence globally, a task that may prove difficult without steps to make the currency more user-friendly.
“The key to internationalizing the yuan lies in softening capital controls and its market fluctuations,”
said Naoyuki Yoshino, chief executive of the Asian Development Bank Institute.
China also aims “to use the yuan more widely in dealing with partner countries” in its Belt and Road economic bloc initiative, said Takahide Kiuchi, an executive economist with Nomura Research Institute.
This road may prove bumpy. The yuan makes up only about 2% of transactions logged by the Bank for International Settlements. By contrast, the Japanese yen accounts for about 8%, along with the euro at 16% and the dollar with a commanding 44%.