China’s Digital Yuan: 5 Ways It Can Impact Global Trade

China’s latest technological feat – the ‘digital yuan’ (e-CNY) – is the first-ever digital currency to be issued by a major national economy. It’s been specifically crafted to move instantaneously in both global and domestic transactions. It’s also arguably on track to completely replace physical cash, and become a major rival to the value of conventional currencies such as the U.S. dollar.

China is very quickly escalating its efforts to get its central digital currency out into the marketplace. In April 2020, just after the COVID-19 pandemic spread across the world, the ‘digital yuan’ began several pilot programs in four Chinese cities. Today, the currency is miles ahead in the space of central bank digital currencies compared to its international peers – with transactions hitting around 87.57 billion yuan (AUD 18.49 billion) at the end of 2021.

Here in Australia, businesses must keep a close eye on this new state-backed digital currency. China is Australia’s most important trading partner, and will very likely remain so in the near future. So below, we’ll look at China’s digital yuan in more detail, why it exists, and highlight five ways the currency is set to impact global trade.

Credit Note: The content for this article was informed by the Australia China Business Council’s webinar held in March 2022.

China's digital yuan

What is China’s digital yuan?

The Chinese digital yuan is a new central bank digital currency (CBDC) that has been developed by the People’s Bank of China. The currency is legal tender, which means that Chinese individuals, businesses and organisations must accept it as a form of payment.

Like any CBDC, the digital yuan is pegged to the value of the country’s fiat currency. Therefore, one e-CNY is currently worth the same as one yuan in paper. They are both exchangeable. Individual users will be able to hold digital yuan in a mobile phone application, and they will be able to buy e-CNY through any of the six state-owned banks of China, as well as the affiliates of the Ant Group and Tencent – the controllers of the country’s two largest digital retail payment platforms.

China's digital currency on a phone

Importantly, the digital yuan is not the same thing as other forms of digital currency payable in China. It is not like WeChat Pay or Alipay. Rather, e-CNY is an actual legal tender and is not tied to one particular platform like WeChat. It can be transferred across several electronic wallets but, at least for the moment, it cannot bear interest.

The Chinese yuan did not appear out of nowhere. It’s the outcome of a six-year adventure that started when the People’s Bank of China announced to the world in 2014 that it was researching digital currency. It’s also appearing in the context of a large-scale change in global financial markets. Central banks all around the world are paying close attention to the intricacies of central currencies, with over 80% of the world’s central banks engaged in CBDC research and 40% of them already working on pilot programs.

Why is China developing a digital currency?

China has a range of social, economic, financial and political motivations for developing the digital yuan.

Efficiency

One of the key reasons China has developed a digital yuan is to improve efficiency within its domestic financial system. Mark Burgess, Chairman (Asia) of the Official Monetary and Financial Institutions Forum, said that a good CBDC can increase the efficiency of a financial system, reduce costs within it and improve the transfer of capital.

The digital currency is showing itself to do this through the development of unique and easy payment methods. This includes methods such as barcode payments, tap-and-go transactions through a digital wallet, the ability to pay offline and facial recognition.

China's Yuan's barcode

Competition & financial inclusion

Another motivating factor behind the development of the digital yuan is the move towards ‘financial inclusion’. This simply means allowing more parties – whether that be individuals, companies or nation-states – to become involved in financial transactions and compete on the global stage.

China has historically had an impressive record of financial inclusion. Between 2009 and 2016, Alibaba’s Ant Finance service loaned nearly 600 billion RMD (around AUD 126.6 billion) to the public. The growth of WeChat Pay and Alibaba has seen financial services expanding across many people and businesses in an effort to keep them ‘financially included’.

WeChat Pay Example

But as WeChat and Alibaba are private companies, there was a limit to what they could do and what kind of product offering they could deliver. With the introduction of the state-backed CBDC, however, it’s estimated that 225 million more Chinese citizens will be able access financial services provided by China’s central bank without needing to open a private bank account. 

This inclusion is set to expand internationally. Financial systems in China are not accessible to everybody in the world. But the CBDC is said to allow better structure for foreigners and domestic citizens alike to access Chinese financial markets. The currency can also work offline, which is key in the event of a natural disaster or in transactions that do not allow electronic transfers.

According to Toby Graham, General Manager – China at ShineWing Australia, fintech in China is seen “as an instrument to increase productivity and raise the standard of living, as a development tool”.

Domestic and global influence

At the end of the day, the digital yuan’s rapid development undoubtedly has its own political motivations.  According to the Center for a New American Security, the Chinese digital yuan has been designed to increase greater domestic state control and to gain a strategic global position of influence. Beijing carries a strong belief that a digital currency will play a critical role in the future of geopolitical competition, and its creation of the e-CNY is a crucial step to getting ahead in that field.

Professor Ross Buckley, Scientia Professor of University of New South Wales, said:

It really struck me early that a CBDC offered more to China than any other country. It offered data on its citizens. It offered potential control of its citizens – potential control over what they spend money on. It gives the government wonderful real-time data on exactly what’s happening. The more the economy happens through a CBDC, the more government can look at … what money has been spent on [and] where it’s being spent.

The real mistake made by Western economies, according to Professor Buckley, was the failure to properly adjust the voting power at key international financial institutions. These included places such as the World Bank and the International Monetary Fund. Because China did not get much of a “seat at the table”, China responded by creating a parallel system – namely, its own CBDC.

5 ways China’s digital yuan will impact global trade

China’s digital yuan has undoubtedly shifted the landscape of international trade. Individuals, businesses, organisations and governments all need to look closely at the evolution of this new digital currency in order to stay on top of the rapidly changing nature of fintech.

Below, we’ll list five ways e-CNY may impact global trade and finance that Australian businesses should keep their eye on.

1. It may globalise financial technology

China’s creation of the digital yuan comes at a time when fintech is growing at a rate we’ve never seen before – with the emergence of new cryptocurrencies, payment methods and more. The development of a nation-backed digital currency, therefore, sets a precedent that may unleash a new wave of digital technology.

In China alone, there is somewhat of a “push to digitise everything”. According to Mr Graham, there is a “push to digitise the economy, to digitise services, health, manufacturing – you name it. There is a push to digitise across almost all industries and sectors”. The new stage of a digital yuan, therefore, may facilitate this ‘push’ globally, and force all countries – Western and non-Western – to quickly catch up.

Globlisation of currency

The Carnegie Endowment of International Peace called the digital yuan a “tool for institutionalisation”. For example, China has plans to create a national Blockchain Service Network (BSN), a digital currency network, over the next 5 years with other global banks. The growth of the digital yuan may make systems such as the BSN look faster, cheaper and easier to use. The digital yuan may also present a unique opportunity for banks across the world to settle payments with one another, rather than through traditional clearing systems such as SWIFT.

The e-CNY is creating intense pressure for other countries to catch up. President Joe Biden in March 2022 signed an Executive Order calling for U.S. agencies to intensify their search for a digital form of the U.S. dollar. He also called on the Federal Reserve to develop recommendations to address cybersecurity issues arising from cryptocurrency. Australia is also far behind but may actually be resisting change, with financial experts warning that a ‘digital currency down under’ could destabilise the Australian Dollar and encourage consumers to bypass banks, simply going straight to holding cash with the country’s Reserve Bank.

2. It may weaken established currencies

While nobody is certain that the evolution of the digital yuan will devalue established currencies like the Japanese Yen, the Euro or the U.S. dollar, it is a possibility. The White House in the United States flagged that the new digital yuan was possibly intended to undermine the U.S. dollar.

According to Diana Choyleva, chief economist at Enodo Economics, China’s new digital yuan is a “key component of an alternative to the dollar-based order that Beijing is building”. By making international payments cheaper and easier, including at places like global ports, there is a “particular appeal for emerging markets that are held back by costly access to dollar-based global payments”.

In a modern economy where the United States is experiencing rising inflation and exceeding trade deficits, the yuan may become America’s main rival. And the digitisation of its currency, according to Michael Hasenstab of the Templeton Global Bond Fund, may “accelerate the elevation of the yuan on the world stage”.

3. U.S. market dominance may weaken

This is closely related to the reason we discussed above. The rise of the digital yuan may mean the U.S. could lose its primary position in global trade and finance. Even America’s own Federal Reserve has admitted their concern that CBDCs (and not just necessarily China’s) could weaken the country’s dominance in the international financial system.

US Dollar Printing

But not everyone is convinced. China’s currency may rise, but “not rule”, according to Eswar Prasad of the Brookings Institute. What is more concerning, he says, is China’s Cross-Border Interbank Payment System which is able to bypass traditional international payment clearing systems like SWIFT. So as the renminbi becomes more widely used across the world, smaller countries with strong links to China may start to settle their transactions using that currency.

4. Cross-border trade may become smoother

One of the most important impacts for Australian shippers will be that international trade with China may become easier and more cost-efficient. This is because of the growth of a new digital infrastructure that has the potential to make transactions even faster, more contactless, more seamless and less burdensome.

Mr Graham argued that the digital yuan is a great opportunity for China’s digital infrastructure to create seamless cross-border trade operations. He said that having a CBDC could change the way China’s ports and logistics operations work by allowing contactless digital export and import transactions as well as customs processing.

“When all this digital infrastructure is widespread,” Mr Graham said, “it’s not hard to imagine the day where there will be preferential terms for digital currency users to access what will be faster, cheaper and more convenient cross-border trade mechanisms”.

There is no doubt that anything reducing the time and costs associated with cross border trade will provide an advantage for shippers. It may even encourage them to take part in using China’s digital yuan. “For larger trading companies, this could provide the opportunity for a huge reduction in costs. At the same time, it opens the door for SMEs and smaller businesses by making low-value trade more viable”, Mr Graham said.

The digital yuan “is more than just another currency,” he said. “It’s an entry point into the incredible digital infrastructure, the digital network and ecosystem that China is building”.

5. Freight forwarders will become more important partners to Australian shippers

Global freight forwarders perform a fundamental role in moving goods across national borders and troubleshoot virtually all the issues that arise while goods are in transit.

As the digital yuan takes more of a role in international transactions, freight forwarders will need to become experts as to how the new currency and its associated payment systems interact with ports, shipping lines, customs authorities and more.

It, therefore, means Australian shippers when engaged in international trade – and especially with China – should seek expert advice every step of the way from freight forwarders. There is already a lot to consider when shipping internationally, from free trade agreements and shipping documents to biosecurity and customs clearance. Throwing a digital currency into the mix adds further to the complexity.

Here at International Cargo Express, our team has decades of combined experience in helping Australian shippers import and export out of China.

Get in touch with our professional team today to discuss your next shipments today.

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