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Is China setting the future agenda for central bank digital currencies?

The Chinese policymakers realise that even if China is on top of the world economic order, it is highly likely that the USD will maintain its dominance 

April 12, 2021 / 01:13 PM IST

The Central Bank Digital Currency (CBDC) wars are moving to the next stage. The earlier wars were limited to which central bank would issue the first CBDC. Interestingly, this war was won by the Central Bank of Bahamas, which issued a CBDC named Sand Dollars in 2020, followed by Eastern Caribbean Central Bank issuing DCash on March 31.

The Bahamas is a small island country and its CBDC did not get much attention. However, the People’s Bank Of China (PBOC) is close to issuing a CBDC, and this is where the game will be really interesting.

A Chinese CBDC

China is issuing a CBDC for two reasons. First, to keep the digital payments within the government fold. China has seen a significant rise in digital payments. However, much of this rise is cornered by private digital platforms such as Wepay and Alipay. This is discomforting for Beijing which prefers to control these matters as we saw recently in the Jack Ma case.

The second reason is to use the digital Chinese CBDC as a counter to the hegemony of the US Dollar (USD). Mark Carney, former Governor of the Bank of England, had pointed out how the United States’ share has declined in world economic activity, but the share of USD remains as strong as ever. Gita Gopinath, chief economist with the International Monetary Fund, in a co-authored research has shown that much of world trade is invoiced in USD, and appreciation of USD against all other currencies predicts a decline in the volume of total trade between countries in the rest of the world.

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Counter The US Dollar

The Chinese policymakers realise that even if China becomes the largest economy in the world in a few years, it is highly likely that the USD will maintain its dominance. This will in several ways be ironic as the largest economy will also like to dominate the global currency and trade invoicing markets.

In this context, the Chinese see a Renminbi CBDC as an outside chance to counter dominance of the USD. The Chinese policymakers also know that promoting the CBDC in their own economy is an easier task when compared to pushing the usage of Renminbi CBDC globally. As the Chinese have started doing pilot projects of the CBDC at home, they have begun to take the next steps towards global outreach of their digital currency.

China-led Consensus

In 2019, the central banks of Thailand and Hong Kong set up a joint research project to study the application of the CBDC to cross-border payments. In 2021, the People’s Bank of China joined the project along with the Central Bank of the UAE. One will not be surprised if in future, the Chinese CBDC is used for cross-border payments and remittances in these regions. This project also fits in the Chinese assertion in South East Asian and West Asian regions.

Apart from joining these multiple projects, Chinese policymakers are also trying to build global consensus around these CBDC-led cross-border payments. The monetary world got a taste of the Chinese medicine in the recently held BIS Innovation Summit. At the summit on March 25, Mu Changchun, head of PBOC’s Digital Currency Research Institute, laid some ground rules for pushing the CBDC-led cross-border payments.

The panellists, on which Mu was present, were asked how the central banks should think about the usage of CBDCs beyond their borders. Mu answered that the main objective of any currency project, whether fiat currency or CBDC, is to “safeguard the monetary sovereignty” and for this central banks have to “avoid dollarization”.  He proposed three key values for CBDC (or fiat currency)-led cross-border payments.

Three Key Values

First, the CBDC should continue to support their own central banks’ ability to push domestic monetary and financial stability, and the same holds for the international monetary system as well.

Second, is compliance where the CBDC should conform to the capital management and foreign exchange regulations of the jurisdictions. This means on one hand the CBDC should improve cross-border e-commerce, but on the other also address the regulatory pain points in money laundering, anti-terror financing, etc.

Third, is the need for interoperability between the CBDC systems across different countries allowing easy exchange of the CBDCs. Mu proposed establishing “a scalable foreign exchange trade platform supported by DLT or other technologies.”

Mu might have not intended but his comments took the media by storm.

After all, one gets to hear very little from Chinese policymakers and even more so from those working at their central bank. The world has been eagerly watching every step the PBOC is taking towards its CBDC, and now wished to figure how it will use its CBDC to increase its global presence. Mu’s comments helped throw light on not just the global ambitions of Chinese CBDC but also their expectations from other CBDC systems.

One should mention the Chinese saying referred to by Mu while answering the above-mentioned question. He said while framing policies, “Do not do unto others, that you don’t want others to do unto you.” On reading this quote, Chinese watchers will most likely retort by saying ‘practice what you preach’!

Keeping this criticism aside, the quote does serve a useful lesson on setting global rules of any kind and more so for the futuristic CBDC-led international monetary system.
Amol Agrawal is faculty at Ahmedabad University. Views are personal.
first published: Apr 12, 2021 09:45 am

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