September 20, 2021
An August 2021 report by the Carnegie Endowment for International Peace (CEIP) shows that China is far ahead of other countries in the development of a “central bank digital currency” (CBDC). Whereas most countries are still researching the possibility of a CBDC, China has been running different types of pilots since 2019. In effect, a CBDC, by eliminating the role of intermediary entities in the financial system, allows for more efficient financial transactions. Based on such efficiency, it is expected that China’s CBDC will boost the share of the yuan in the global financial system. Yet, turning the yuan into the global reserve currency is not China’s primary goal here.
Instead, China primarily seeks to protect its companies against American sanctions by building a financial infrastructure that parallels the US dollar system. The report highlights several reasons as to why China’s CBDC is likely to become a standard. China’s pilots are far ahead of other countries and its government is willing to boost adoption aggressively (e.g. discounts for consumers, incentives for trade). Also, China has already set standards for a new global financial infrastructure through “m-CBDC” (a cross-border payment project between China, Hong Kong, Thailand and the UAE), the Blockchain Service Network, and the inter-bank payment system of CIPS. Finally, China already has large international payment platforms which are accessible through government intervention (UnionPay, Alipay, WeChat Pay).
- What are the consequences of a Chinese parallel (to the U.S. dollar) financial system for trade and capital flows?
- To what extent will the CBDC be able to boost the dominance of Chinese firms in other regions (e.g. Southeast Asia)?