China's e-currency explorations and future of trade

A more grounded understanding of China's digital currency, the e-CNY, may help Aotearoa continue to grow its trade relationship with the economic powerhouse, writes Xin Chen.

The waning use of cash in New Zealand, paired with emerging innovations like stablecoins, has encouraged the investigation of a central bank digital currency (CBDC), which, unlike cryptocurrency, will be supported by the Government and issued by the Central Bank.

In a world where cryptocurrencies and big-tech companies are aggressively infiltrating financial services, the idea of issuing a CBDC in New Zealand is seen, at least in part, as a defensive move to protect the country's monetary sovereignty. It may also be a protective measure against potential currency substitution challenges posed by foreign CBDCs.

China meanwhile launched its central bank-issued digital currency, the e-CNY (Chinese yuan), in 2020. Given that China is Aotearoa's largest trading partner, and that it has already officially applied to join the Digital Economy Partnership Agreement signed by New Zealand, Singapore and Chile, a more grounded understanding of the e-CNY may help NZ to continue growing its win-win bilateral economic/trade relationship with China.

The People's Bank of China began its digital yuan investigations in 2014. It established the China Digital Currency Research Institute in 2016, completed research, design and system testing in 2019, launched the e-CNY in 2020, also known as digital RMB or Digital Currency/Electronic Payment (DCEP), and has since been conducting on-the-ground trials in more than 20 cities across the country. One such trial was carried out at the 2022 Beijing Winter Olympics, where over US$315,000 in e-CNY were reported to have been used every day.

Along with the birth of the e-CNY, the Chinese economy has witnessed a dramatic transition towards digitalisation. Supported by the fintech giants, Alipay and WeChat Pay, and the public enthusiasm for mobile payments, China is also rapidly moving towards a cashless society. In major cities like Beijing, even people living rough in the streets use QR codes and mobile payment apps to accept donations. This almost total societal adoption of digital transformation speaks to the potential of the e-CNY.

However, the impact of China's digital currency ambitions is not felt only domestically. There is an increasing sentiment that as an early adopter of a central bank digital currency, the Chinese yuan has an advantage in competing with the US dollar as the world's main reserve currency. Many in the international community also wonder whether the rollout of the e-CNY will reshape the world's currency landscape and impact bilateral, regional and multilateral economic and business interactions.

In response to concerns about the e-CNY, Chinese financial officials have repeatedly said that efforts to create a digital yuan are aimed at serving domestic retail demands. Moreover, they emphasise that the e-CNY changes only the Chinese yuan's form and ways of usage, not its actual value or impact on the international financial market and system.

In addressing growing public curiosity within China about the yuan as an international currency, Chinese finance professionals, scholars, and commentators state that the e-CNY is a helpful but "insufficient provision" for the yuan's global adoption and usage.

They also emphasise that history indicates that the internationalisation of a country's currency often lags behind the growth of its economic power. Citing the International Monetary Fund's findings that the Chinese yuan still accounts for less than 3 percent of global foreign currency reserves, they maintain that the journey for the yuan to become a popular global currency will be long and evolutionary.

Nonetheless, many Chinese finance professionals, researchers, and commentators hail the e-CNY system as an innovative and robust financial infrastructure.

They are hopeful that when embellished with features like lower costs, higher efficiency, and "settlement upon payment", the e-CNY will appeal to countries that are world leaders in the digital economy but with a limited number of large companies with global influence. These countries usually pay special attention to opportunities for their SMEs to adapt to and benefit from new digital business models and trading patterns.

Standing out in this group, as noted in some Chinese studies, are Singapore and New Zealand, which are also highlighted as important Regional Comprehensive Economic Partnership (RCEP) participants and founding members of the world's first digital economy partnership (DEPA).

Financial silk road

The notion of building a financial silk road and promoting local currencies first in cross-border economic and business activities has been gaining traction in Chinese corporate circles. Many in China's business and research sectors give particular importance to RCEP members as most are not only on China's Belt and Road Initiative land and maritime routes, but also among the world's important producers and consumers of bulk commodities.

The RCEP free trade agreement has thus opened new avenues for China to work with its member countries in building a united commodities market where currencies from within the region, including their digital formats, are used as the standard price and settlement mechanism.

The efforts in this regard may in turn allow the e-CNY more opportunities to help expedite the ascendance of the yuan to a regional anchor currency status for trade settlement, direct investment, loans, and aid funds.