Two Charts That Show How China Is Using Digital Currency

Feb 18, 2021 - 2 minutes read time

Two Charts That Show How China Is Using Digital Currency

This past week, people celebrated the Chinese New Year. Some 50,000 Beijing residents received digital pocket money from the government. Each one got 200 yuan ($31) in a virtual “red packet” that they could use for online and offline shopping. 

The total handout of $1.5 million is latest digital currency pilot in Beijing. Unlike any cryptocurrencies, the “digital yuan” is a form of China’s fiat money. It is pegged 1:1 with the existing yuan. It’s also backed by the central bank.

Will it take off? So far, China has been the quickest adopter of digital payment systems.
Chart That Show How China Is Using Digital Currency
But the “digital yuan” also has a new, distinct feature. Almost all mobile payment requires a third-party payment platform, like Alipay, PayPal, or Square. The “digital yuan” doesn’t. You can withdraw e-yuan via an ATM machine and load the money on your smartphone. You then pay for items by holding your phone to a point-of-sale device. The device uses near-field communication (NFC) technology. That’s how people can pay without the internet. You don’t even need to link the e-yuan with an existing banking account.

This is a huge advantage in mobile payment. Now, people from remote rural areas without steady internet can use it too. I’ve joined the BBC here to discuss the implications of this setup. 

Consider the many developing economies outside of China. They also have large populations of people without access to banks. When they deploy a similar approach to digital currencies, their “unbanked” populations will then be able to participate in the mainstream economy. It will bypass the need for expensive banking products and infrastructure.

But what about blockchain and other cryptocurrencies? 

Beijing seems to have given up on them. When we look at the daily transactions worldwide, Bitcoin barely registers in the big picture.
Chart That Show How China Is Using Digital Currency
Meanwhile, China is working to internationalize the digital yuan. It signed a joint venture last month with Swift, the Belgium-based global system for cross-border payments. If China can roll the digital yuan out fast enough, it might challenge the dominance of the US dollar in international trade settlement. But even Chinese bankers caution against too much optimism. A director at a large state-owned bank says, “progress towards this will only be gradual.”


Stay healthy,

Howard Yu signature

P.S., Digital payment has accelerated during the pandemic. What’s your view on cryptocurrencies? Tesla is accepting Bitcoin as a form of payment and investing in it. But the energy needed to mine Bitcoin seems unsustainable. It is reportedly consuming more electricity than Argentina. What standard of digital payment is likely to win the day?

This article is co-authored with Jialu Shan, a research fellow at the Global Center for Digital Business Transformation, an IMD-Cisco initiative.



Willy Sussland Feb 18, 2021 at 2:58pm

Thank you for these inputs. In digital money, China is well ahead of the rest. It was interesting to see that the Chinese government gave Beijing residents 200 Yuan, I thought internally the Chinese currency was the renmimbi.

The wold's second largest economy has valid economic and political reasons to have a world trade currency, the Yuan, and a digital Yuan. One can wonder about the exchange rate renmimbi (the internal currency) to the Yuan, and possible manipulations of the latter. It will also be interesting to see to what extent the yuan will replace the US $ first within the 15 TPP countries, and then within the West by the end of 2023. Again, many thanks for this information.

Marc Faltheim Feb 18, 2021 at 2:13pm

Hi Howard,

After the pulled listing of Ant in the Shanghai and H.K. financial markets (which greatly surprised me at the time given how close to the actual listing), this news about the Digital Yuan seems a very astute way for the Chinese government to manage the process i.e. you create a digital currency but it is all regulated and transparent. The state in China setting the agenda within the country.
You write that there would be no need to have a Chinese bank account to use the E-Yuan. Is it your understanding that a foreigner who frequently visits China say for work could also use the E-Yuan for payments in China?
In the "west", it seems like the situation is approached from directly the opposite side. Private sector entrepreneurs, often with a Libertarian bent are creating these E-currencies. Then various politicians, regulators eventually need to decide how much the currencies need to be regulated, reigned in so to speak, or not.

Beth Cannon Feb 18, 2021 at 8:55am

Your blog posts are always packed-full of information we need! Thank you for always keeping me up to date with all your latest insightful takes.

Darren Lake Feb 18, 2021 at 8:12am

China's really impressive, how they are always one step ahead of all the rest in everything. I'm very much looking forward to how they will progress on this one.

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