Why is China's yuan going digital?

China is already number one on the globe for mobile payment penetration, with 790 million persons likely to be using such payments this season.

Chinese consumers logged a lot more than 60.5 billion mobile payment transactions in 2018, with spending at 277.4 trillion yuan (US$39 trillion) - an enormous leap for that which was once a mostly cash economy.

A government-backed digital currency, however, is likely to take what to another level.

Beijing has recently begun trials of its digital currency electronic payment (DCEP). If successful, it might transform the international financial system, some analysts said.

The trials try to cover a broad spectral range of use cases, which range from retail to transport and salary payment.

The digital currency has been piloted in four Chinese cities - Shenzhen, Suzhou, Xiong’an and Chengdu.

According to Ms Shirley Yu, Asia fellow at the Harvard Kennedy School, the digital yuan was used to pay up to half of government workers' travel expenses in-may.

China’s four major national banks and three major telecommunications companies get excited about the trial, as are American companies such as McDonald’s, Starbucks and Subway.

The next phase of the trial is likely to take place during the 2022 Winter Olympics in Beijing.

GREATER THAN A DIGITAL WALLET

Mobile transactions made up 80 % of payments made in China this past year. Screenshots of the digital yuan app circulating on social media reveal its similarities to these digital wallets.

The DCEP, however, is greater than a digital wallet or an electric payment solution. This is a digital sort of fiat money, or currency whose value is backed by the government.

It is pegged 1:1 to the paper renminbi, and is merely like having paper money.

Of course, digital currency itself isn't a new thing.

And the growth of the crypto sector has sparked concerns that digital coins could possibly be used for the money laundering.

Experts however have said that virtual currency may possibly also tackle a different kind of “dirty money” - as Chinese authorities discovered through the COVID-19 outbreak.

Vast amounts of dollars in cash was collected from Hubei province, particularly from the pandemic’s centre in Wuhan, through the outbreak and sanitised.

A few of the money had to be disposed of, however, in order to avoid spreading the virus through banknotes and coins.

If that cash had been digital yuan, said Mr Shi Yuntao from software consultancy ThoughtWorks China, there would have been no such worries.

Another feature for consumers, especially those not located in China, is that the machine doesn't need an e-wallet or a Chinese bank account.

Ben Cavender of the China Market Research Group sees potential for the digital currency in the Belt and Road Initiative, China’s ambitious goal to link together development and infrastructure projects in a lot more than 60 countries.

“There are a great number of consumers and small enterprises in these markets, who may well not get access to a bank. They might not exactly have ways to change currency, or they may be within an economy where the value of their own economy might fluctuate. Therefore many of these people might be considering by using a digital currency like this because they can easier control their business relationship with China. They’re not likely to be losing profits on forex, and it’s likely to be much cheaper for them to make transactions.”

With time, the yuan may increasingly be internationalised, but authorities are divided on whether it could challenge the hegemony of the united states dollar.

Mr Jasper Lee of social trading network eToro said he believes that the digital yuan could eventually have a occurrence in the global markets, and in addition as a storage of value. This, he said, could eventually challenge the dominance of the united states dollar.

The road will be long though.

Mr Shi pointed out that according to a 2016 survey by the lender for International Settlements, the yuan's share of international currency transactions was 4.3 %, compared with 88 % for the united states dollar and 32 per cent for the euro.

“There’s a long way to visit catch up even to the euro, the closest competitor to the united states dollar,” said Mr Shi.

Mr Cavender said he expects the US dollar to stay a safe haven during a down economy.

“But over the long run, it's very clear that there surely is likely to be pressure to move more towards these state-backed digital currencies, whether it's China's or a handful of others that might wrap up being created over another few years.

"At that point you will definitely see probably less of a reliance on the united states dollar as a difficult currency or as a reserve currency, because there will be these other options which are steady and very simple to track and trace.”

The outlook for China’s digital currency could also be tied in with the changing role of China on the international stage.

As Ms Yu of the Harvard Kennedy School put it: "The DCEP itself cannot turn into a true global currency because it's a digital currency, unless the renminbi is recognised as a genuine global currency. So fundamentally, it really is about the financial status of the country and its currency status, and globally, which will push this currency towards its utilization and its adaptation globally."