The Awakening of the Chinese Dragon

"The future of money is digital currency" - Bill Gates

One of this biggest economies in the world became the first major country to launch the first ever digital currency the e-RMB (electronic Renminbi) that can change the world of finance forever. China is the 2nd largest economy in the world on the basis of nominal GDP and number 1 on the basis of purchasing power parity. The world's most populous country, with a population of around 1.428 billion, China over the past 40 years has successfully achieved trade, economic and military geostrategic globalization. However, China has failed to achieve the financial globalization.

In order to understand why? - Let’s take a step back to analyse the basics of the Chinese currency first. The RMB abbreviation means “Ren Min Bi” that translates into “People’s money”. While Yuan is the base unit for RMB – just as Dollar is for USD, Renminbi is the official currency of China and acts as a medium of exchange. Yuan is the most dominant currency in the realm of trade globalization where China has become the highest exporting nation in the world. This obviously did not happen overnight, but almost half a century struggle of economic reforms. One of the most significant milestones of Chinese trade domination was achieved back in 2002, when China became a member of WTO (World Trade Organization), at the behest of United States of America. This alone was a game-changer that allowed China to export in large quantities to the rest of the world year upon year. From there on China went to becoming an economic leader in the world.

Since 1991, Chinese economy has never grown less than 6% reaching a heighest of 14.2% in this period in 2007 becoming a $14.1 trillion economy as of today.

As a key player in economic globalization China began giving credit lines to needy countries. Many of those who were unable to repay eventually had to convert the debt into equity – Sri Lanka, being just one of many classical examples. As a result the companies in China grew massively becoming multinationals of giant size adding significantly to the Chinese economy.

While achieving all the economic power, the Chinese military achieved new heights of geostrategic globalization too. One of the prime examples here was the opening up the naval bases in Djibouti which is located in the Horn of Africa, after striking a deal with then President Ismail Omar Guelleh, back in 2015. This was the first overseas military base for China and was built at a cost of around over half a billion dollars. This facility significantly increased China's power projection capabilities in the Indian Ocean. And of course, the OBOR (one-belt-one-road) initiative where China took over the entire Eurasia influence in one-shot.

But despite all of this, China failed miserably on one side – which was financial globalization. This was primarily because the Chinese financial markets, including the capital and debt markets, were not as open to the rest of the world. Because of the policies and sentiments of Chinese Communist Party’s authoritarian and totalitarian tendencies China suffered investor's confidence. As a result the Chinese currency influence could never grow on global trade compared to the dollar, as the dollar remained as the reserve currency or in other words the primary currency for global trade. The oil, gold or any commodity prices have always been quoted in US dollar terms.

Hence, China realised that it has to displace US dollar as a reserve currency to fulfil its dream of becoming the global super power by 2050.

Although the Chinese Yuan has been pegged against the dollar, this move has always ignited fury from its competitor the United States of America. This is primarily because the Chinese currency has been artificially fixed at a certain rate that augmented stability of their growing exports. This cannot be done forever and China has come to realise that sooner or later it has to displace the dollar as a global reserve currency. This idea has given birth to electronic RMB (e-RMB).   

The launch of e-RMB can be backed by 6 reasons which will put China as a global financial leader in my opinion:

1.      Replacing the US dollar

A sovereign digital currency provides a functional alternative to the dollar settlement system and blunts the impact of any sanctions or threats of exclusion both at a country or company level.

2.      Financial globalization of China

It may also facilitate integration into globally traded currency markets with a reduced risk of politically inspired disruption.

3.      More control

Because cash transactions were offline and transaction data from existing payment platforms was scattered, the Central Bank of China (PBoC) was unable to monitor cash flow in real time.

4.      The rise of private money

There is a growing sense that central banks worldwide should issue a digital version of cash to prevent the “privatization” of money by commercial entities and IT firms.

5.      Chinese blockchain existence

China has in the past weeks made its Blockchain-based Service Network – or BSN – available for the global commercial use, according to reports. The BSN, led by the Chinese government-backed think tank State Information Center, is a global infrastructure that claims to help projects create and run new blockchain applications for a lower cost. It also aims to accelerate the development of smart cities and the digital economies.

6.      Impact of Corona virus (Covid-19)

The still-raging novel coronavirus pandemic and the higher health and hygiene awareness among the masses have also added impetus to the trial of the digital currency. While there has been a dramatic drop in cash in circulation in Wuhan, the initial ground zero of the virtual outbreak, most retailers over there refuse to accept coins or paper money as a precaution against the highly contagious pathogen.

What happens next? The emerging economic powers such as India, Brazil and Russia will now be evaluating adoption of the new modern alternative financial economic system to remain relevant. Interestingly, the PBoC’s Digital Currency Research Institute does not want a blockchain-based approach as it is a decentralized and distributed ledger because in that way that centralized book keeping and administration of the Chinese state as authoritarian mindset would lose control. Therefore the sovereign digital currency will have to be pegged against the national currency. The digital yuan e-RMB will have the same legal tender status as cash.

The mass pilot project of companies, public sector and the civil servants being paid in e-RMB the electronic payment (DCEP) project for digital yuan which began in 2014 will officially be launched in May 2021. The PBoC will be the sole issuer of digital yuan, initially offering the digital money to commercial banks and other operators the public would also be able to convert the money in their bank accounts to the digital version making deposits via electronic wallets. This technology allows the digital currency to be exchanged without any internet connection and it can be used to make contactless payments. This means in nearly 10 years or so, we will see some other Central Banks around the world adopting the same concept of digital currencies of their own.

This concept of central bank digital currencies (CBDCs) is due to factors like declining cash use and plans for privately owned “stablecoins”, such as Facebook’s Libra. The Swiss Financial Market Supervisory Authority (FINMA) confirmed in April 2020 that it had received an application for a payment system licence from the Geneva-based association governing Facebook’s planned cryptocurrency Libra. The central banks of France and the UK are also both moving forward in respect of CBDCs.

Now you must be thinking, what happens to the existing system? The other forms of money supplies and savings like M1 (total amount of M0 outside of the private banking system, the amount of demand deposits and other checkable deposits) and M2 (M1 plus savings accounts and money market accounts etc) will remain unchanged. Actually, a part of the nation’s M0 supply will be digitalized while M0 supply will be the monetary base that is the total of all physical currencies including coinage. China’s M0 supply stood at 8.3 trillion yuan ($1.17 trillion) in 2019 but the annual increase in this has slackened to just 3-4% since 2012 and impervious to the surges in credit and loans. The interesting thing is that since 2000-2010 the M0 throughout this period was double-digit. Meaning that all the paper money already issued in circulation or deposits has not been affected. But the cash system needs to be reformed now, which will not disrupt the velocity of the money in circulation. On the contrary in the US the M0 has grown at a very steady pace.

The world still believes in the mighty US dollar as it is still the reserve currency while the US treasury remains the safest medium of investment regardless of the interest it pays. But as a result of this phenomenon move by China, the digital currency launch is all set to disrupt the mighty US dollar. In China, digital payment platforms have been widespread such as Alipay, owned by Alibaba’s Ant Financial, and WeChay Pay, owned by Tencent, but they do not replace the existing currency. With PBoC’s backing, the e-RMB will gain traction fast and give the duopoly of AliPay and WeChat Pay tough competition. The PBoC has clarified that the transactions facilitated by these platforms fall in the category of M1 and M2 and would not be affected when part of the nation’s M0 supply in digitized in 2021. The PBoC is starting trials in Shenzhen, Suzhou, Chengdu and Xiong’an, a new national development zone on the outskirts of Beijing. The pilot scheme will be expanded to cover high-denomination banknotes and outlets such as McDonald’s, Starbucks and Subway among the 19 mass consumption brands participating in the trial. A nationwide rollout is expected in 2-3 years when PBoC aims to reduce the amount of hard cash it needs to print. Eventually, ATMs and counters at the banks will become redundant as they will no longer be required after the e-RMB.

In conclusion, the e-RMB will start small, but the digital yuan can disrupt both traditional banking and the post-Bretton Woods system of floating exchange rates that the world has lived with since 1973. For China, blockchain and the yuan digital currency are a national strategic priority – almost at the level of the internet. We are entering into a new era. An era of BharatCoin (India), FedCoin (United States of America), E-Krona (Sweden) amongst many other digital currencies which will form the basis of a truly new digital financial system in which e-RMB will set the base for China to be the new superpower of the 22nd century.