Swapping notes

Will going digital transform the yuan’s status at home and abroad?

Don’t count on it: the new yuan will be a lot like the old yuan


WITH A FEW taps on her phone, Lu Qingqing, a 24-year-old office worker, leapt into the monetary future. 

She was one of 50,000 people in the city of Shen­zhen selected late last year for a trial of China’s digital currency, officially called eCNY. 

She downloaded an app, received a gift of 200 yuan ($30) from the government and went shopping for books. 

The app’s display showed a traditional banknote and her balance, which ran down as she made purchases. 

“It felt like real money,” she says.

Legally, it is as real as hard cash. 

All the money in an eCNY app, offered by one of six commercial banks, is backed by an equivalent amount deposited at the People’s Bank of China. 

Just as the central bank issues and stands behind any paper yuan circulating in China, so does it guarantee eCNY. 

If, say, the commercial bank that made Ms Lu’s digital wallet went bust, her eCNY—linked to her personal-identity number—would be transferred to a new wallet.


Central banks worldwide are considering issuing digital versions of notes and coins. 

Although China will not be the first (that honour goes to the Bahamas), it is the most important launching ground. 

It is the world’s leader in mobile payments, processing about $67trn-worth of transactions last year, nearly 400 times more than in America (see chart 1). 

More than half a million people have already got their hands on eCNY, in a manner of speaking, in trials since last year. 

China’s central bank is studying how to spread it abroad. 

Niall Ferguson, a historian, has called on America to wake up to the peril of letting China “mint the money of the future”.

China’s digital currency was first conceived as a way to curb the dominance of the big mobile-money providers. 

Now three bold claims are being made about it: that it will dramatically enhance China’s surveillance capabilities; that it will allow the state to wield far more control over money; and that it will challenge the dollar for global prominence.

Within China, however, many economists and bankers are far less bullish. 

The design of the eCNY, and the very nature of China’s economic system, mean that each of these claims is unlikely to be realised soon. 

“The digital yuan is not magic, so we don’t expect magic from it,” says Gary Liu of the China Financial Reform Institute in Shanghai.

Start with the first claim, that digitisation offers unmatched surveillance abilities, letting the state track people’s spending in real time. 

It is not entirely wrong. 

But it is a limited gain for the central bank compared with its existing powers.

Most mobile payments today involve a bank card, tethered to users’ accounts on Alipay or WeChat. 

These must pass through NetsUnion, a central clearing platform. 

Similarly, any foreign-exchange transaction in China takes place on the China Foreign Exchange Trade System. 

In both cases regulators can see how people spend in real time. 

For mobile payments that do not touch the banking system, officials can demand a record and, says an industry insider, may soon require real-time reporting, too.

The upshot is that, even without eCNY, regulators have no real blind spots left, apart from old-fashioned cash. 

And so long as millions of older citizens do not much like paying for things with smartphones, the government will not phase out cash.

Centrally unplanned

A second bold claim about eCNY is that it will reshape monetary policy in China. 

According to this view, the central bank will, among other things, have more control over money, programming it to be used for specific purposes and at predefined times. 

This, however, both understates what the central bank can already do and overstates what the eCNY will let it do.

China already manages both the money supply and interest rates with different sectors in mind. 

Since 2015, for instance, it has created hundreds of billions of yuan for the construction of affordable housing. 

More recently it has tried to lower interest rates for small firms, giving cheaper funding to banks that provide such loans.


The eCNY, one might assume, will make this targeting more precise. 

But its design is such that its role will be far more circumscribed. 

The central bank will replace only a small portion of base money, known as M0, with eCNY, leaving the rest of the money supply undisturbed (see chart 2). 

It will distribute eCNY through a two-tiered system, issuing the currency to commercial banks, which in turn will make it available to the public. 

It will not pay interest on e­CNY. 

And it will probably place low ceilings on how much people can actually hold.

Granted, the central bank may in time expand the eCNY’s role. 

But the limitations exist for a reason. 

The government is wary of undermining the financial system. 

It does not want savers to switch out of bank deposits en masse into eCNY. 

That would make it harder for banks to fund themselves, thereby slowing lending growth. 

Moreover, few serious economists in Beijing like the idea of a 100% eCNY money supply, in which the government could directly control how banks lend. 

“We don’t want to go back to central planning. 

That would be a mistake,” says Yu Yongding, a former adviser to the central bank.

A different world

A final bold claim is that eCNY will catapult the yuan to global status. 

But that misunderstands why the yuan accounts for just 2% of international payments today, about the same as the Australian and Canadian dollars. 

When deciding which currencies to use, companies and investors around the world consider how easily they can make conversions to other currencies; how freely and widely they can invest them; and whether they trust the issuing countries’ legal systems. 

China’s insistence on maintaining far tighter capital controls than any other major economy, as well as deep-seated doubts about its one-party political system, blunt the yuan’s international appeal. 

The limiting factors are policy and politics, not technology.

Even the technological case for eCNY is far from clear-cut. 

When companies transfer money in and out of China, they already use currency in a digital format: electronic messages on the SWIFT payments network instruct banks to credit accounts in one country and debit them in another. 

What slows things down is complying with China’s capital controls and with international regulations such as those aimed at stopping money-laundering.

The eCNY will not eliminate such checks, and the Belgium-headquartered SWIFT system, which connects more than 11,000 financial institutions, is likely to remain the most efficient conduit for sharing payment information across borders. 

“Even in the long term, SWIFT will remain indispensable,” says Liu Dongmin of the Chinese Academy of Social Sciences.

The three more radical claims about it may not be realised, but will the eCNY at least fulfil authorities’ original aim, of giving the central bank a foothold in the digital-payments universe? 

Probably, but not a giant one. After the eCNY trial in Shenzhen, Ms Lu said that she would use it for some payments, but that Alipay and WeChat were far more convenient because of how they tie into much wider commercial and social-messaging networks. 

Mr Liu of the China Financial Reform Institute expects others to reach the same conclusion. 

In three years he predicts that eCNY will account for less than 5% of mobile payments.

Western governments and central bankers mulling digital currencies of their own may wonder if the outcome of the e­CNY experiment will contain any lessons for them. 

But China is unusual in so many ways—from its sheltered financial system and intricate capital controls to the size of its mobile payments—that its experience could well prove to be unique. 

Other countries might not, for instance, seek to design their digital currencies along the same lines. 

Yet the caution with which China’s authorities are proceeding with the eCNY, if nothing else, hints at how disruptive the technology, if unconstrained, could be.

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