The e-RMB: China’s digital currency in the COVID-19 era

MONEY MAKES THE WORLD GO ROUND

The US dollar is the most powerful and influential currency in the current financial market. In 2019, the US dollar made up nearly 90% of all international transactions and 60% of all foreign exchange reserves. In comparison, the Chinese currency — the renminbi (RMB) — only made up 2% of global payments and reserves, making it the 8th most traded currency in the world. According to Kenneth Rogoff, a Harvard professor of economics, this is thanks to “China’s burdensome capital controls” and “the general opaqueness of its financial system.”

The supremacy of the US dollar gives US economic sanctions their strength; as the majority of international banks trade in US dollars, it is nearly impossible for sanctioned nations such as Iran and North Korea to conduct international business. China has, therefore, been looking for a way to subvert US financial supremacy for over a decade. The latest solution, a digital currency, was officially announced by the People’s Bank of China (PBOC) in 2014 as the Digital Currency/Electronic Payments project, and in August 2019, the bank published a three-year plan for rolling out the currency. Blockchain has also become an important venture for China, and in October 2019, President Xi Jinping called for the country to “seize the opportunity” afforded by blockchain technology. The Chinese government apparently sees technological advancements in its financial systems as a way to improve the country’s standing in the financial world.

This move towards digital money has gained momentum with the COVID-19 pandemic. While the risk of transmission is low, public concerns that the virus might be transferred by cash could drive consumers away from hard currencies. This trend towards digital payments is growing around the world, with many countries — including Australia, Sweden, South Korea, Russia and the UK — moving towards a cashless society. However, China has been ahead of the curve on digital payments and the residents of Chinese major cities usually pay for goods and services via smartphone apps like Alipay or WeChat, which are linked to their bank accounts. This could help Chinese consumers adopt the PBOC’s digital currency, as it follows the same process as digital payments.

ONLINE MONEY

On April 17, the PBOC revealed that it was rolling out tests of a national digital currency in the cities of Shenzhen, Suzhou, Xiong’An and Chengdu. This currency, known as the e-RMB, will be issued in only small amounts and will only be able to be used for certain services, such as transport in Suzhou and food and retail in Xiong’an. Although the PBOC’s statement made it clear that this was just a test, it is a major move into digital currency for the Chinese central bank.

A digital currency is money that only exists digitally. While it can be used just like regular money (where it is accepted), it has no physical form and transactions can be sent from any place and received at any point in the world. The key distinction between digital currencies and more infamous cryptocurrencies such as Bitcoin is in their use of blockchain technology. Cryptocurrencies use blockchains to be decentralised and anonymous, with no supervisory authority. This makes Bitcoin highly volatile as well as alluring to criminals, as its anonymous nature makes it easy to conduct illegal transactions. In 2017, the Chinese government banned cryptocurrencies, ostensibly because of their use in criminal actions.

Digital currencies use blockchain as well, but they operate with a centralised authority and require user identification. The e-RMB has no anonymity and requires users to download and register to an app on their smartphone. This centralisation means that the Chinese government would be able to shut down and seize accounts, something that is nearly impossible with the more democratic cryptocurrencies. The centralised approach also means that individuals can rectify mistakes made when using digital currency, which is virtually impossible with cryptocurrency. China is not the only nation to develop a digital currency, but others — such as Ecuador’s dinero electrónico (2015) and Venezuela’s petro (2018) — have fizzled. Private corporations have also begun launching digital currencies. In June of last year, Facebook announced a digital currency called Libra, which uses similar blockchain technology to the e-RMB. But government concern about the effect of a private currency such as Libra on the financial system has significantly delayed and curtailed Facebook’s project.

NEW MONEY, NEW PROBLEMS

The e-RMB is still in a trial stage, but if the PBOC deems it a success, it could roll out across the country over the next few years. The e-RMB will not immediately free China from an international financial system dominated by the US dollar, but it will expand China’s financial reach and make it easier for China to subvert US sanctions and conduct business with countries like Iran and North Korea. It will also challenge the ability of the US to enforce international trade penalties against Chinese companies such as Huawei. Moreover, the e-RMB could be used in global settlements, reducing China’s dependence on other national currencies.

However, the criticisms faced by Facebook’s Libra and other corporate digital currencies gain a sharper edge when levelled at the e-RMB. When Facebook first declared its digital currency, the company’s plans were immediately challenged by US lawmakers. Congresswoman Maxine Waters called for a stop to the project pending a congressional review, claiming the digital currency represented Facebook’s “unchecked expansion and extending its reach into the lives of its users.” The Chinese government has similarly been accused of invading the privacy of its citizens, and a digital currency would give it the ability to monitor individual financial flows in real-time. Although this could assist the state in tracking citizens who commit money laundering and tax evasion, it could also track those the government perceives as threats, deny them funding and use their transactions as evidence of civil disruption. The list of potential targets includes political organisations, ethnic and religious groups, and any group that is deemed a ‘danger’ to society.

The ability to track financial flows swings both ways. The e-RMB could help Chinese citizens could follow state finances and observe whether taxpayer funds are being allocated as intended. This could heighten citizen and state awareness of corruption and wasteful spending. However, the balance of power between the Chinese government and its citizens is unlikely to be challenged by the e-RMB.

The Chinese government is aware that its digital currency will not immediately change the financial world. Even with a head start, a Chinese digital currency is unlikely to supplant the hegemony of the US dollar, but that that is not its only purpose. The Chinese government sees the e-RMB as a long term project that will pay dividends years after it is officially released. Over the long-term, the e-RMB will create new avenues of financial management and control, provide a tool to monitor cash flows and financial trends in fine detail (enabling adjustments in economic and tax policy on a more direct level), increase the accessibility of the renminbi worldwide, and offer a stronger foothold in international finance.

All of this relies on the trials being a success, and that is dependent on whether Chinese citizens adopt the digital currency. No blockchain-based currency has yet been adopted on the vast scale China is hoping for. However, the e-RMB may succeed where others failed if the Chinese government is able to impose it on its citizens. Some government officials in the test cities are currently receiving their salaries in e-RMB, copying a tactic used to introduce the Euro — by slowly integrating it in government spheres. But unlike the cash-based Euro, the difficulty of introducing a digital currency means that the e-RMB is unlikely to wholly supplant paper currency; instead, it will supplement and support the RMB internationally, increasing the currency’s reach and strength.

The world is becoming more digital by the day, and China has taken the lead in financial technology to establish a stronghold in this new realm.