Friday, November 13, 2020

Updates on China's Digital Yuan

We last checked in on the digital yuan with October 13's "China’s central bank urges faster digital yuan roll-out as other countries begin tests".

Here's the latest. First up China Daily makes a pun, November 9:

Digital yuan gaining wider currency

Trial of DC/EP in Shenzhen shows tech innovation could strengthen monetary system

When China's years-long efforts for a cashless society bore fruit in Shenzhen, Guangdong province, on Oct 12, some 50,000 lucky residents of the southern boomtown, winners of a lottery, received the first batch of DC/EP, or digital currency/electronic payment.

DC/EP was issued in the form of hongbao, or electronic red packets, worth 200 yuan ($29.9) each. Some of the winners recalled that 2,000 years ago, the reigning emperor of the Qin Dynasty (221-206BC) unified China for the first time by exhorting Chinese people to use a single currency. Back then, the only legal tender of the empire was made in gold or copper.....


And a little less rah-rah but noticeably more pro-regime than it would have been a year ago, Hong Kong's South China Morning Post via MSN News, November 5:

Digital yuan push for fully cashless society on course to pay off 

China is moving closer to launching a sovereign digital currency. Released ahead of the fifth plenum, the central government's major policy meeting, the draft law by the country's central bank will establish the digital yuan, formally known as the Digital Currency Electronic Payment (DCEP) system, on par with the fiat currency. Though no firm date has been set, the speed and ambition with which Beijing has moved to set up a digital yuan will likely realise a fully cashless society sooner than anyone.

The formal legal framework for the digital yuan means it is effectively a fiat currency backed by the central bank for every yuan it issues, whether electronically or in print. It will be treated as what economists call M0, that is, the same as paper notes and coins in circulation. The potential convenience and ease of use are obvious. Distributed through commercial banks, you can go to any outlet and withdraw yuan with the options of receiving physical notes or their digital equivalents.

More importantly for Beijing, the new money system will offer the central bank and other financial policymakers a real-time view of how money is being used. For the first time, authorities will know where every yuan goes and how it's spent. Such insights will literally give a greater bang for the buck or yuan, on how authorities formulate, and respond with, monetary policy, stimulus spending, and dealing with inflation and deflation, as well as recession and other economic conditions....


So far, over four million transaction have been processed using the digital currency and the dollar-equivalent volume is up to $400 million ($300 million in this Reuters story 12 days ago).

And finally, from CoinDesk November 12, a preview of coming attractions:

How Ant’s Suspended IPO Is Related to China’s Digital Yuan

Ant Group’s suspended initial public offering (IPO) has shed further light on a possible motivation behind China’s digital yuan. The Chinese government appears to view the payments giant as a destabilizing force to China’s economy, and the digital yuan is a way to keep companies like this in check. 

Industry watchers say the People’s Bank of China (PBoC) might use the digital yuan as part of a broader effort to curb the growth of Alipay and WeChat Pay. The central bank digital currency (CBDC) could stunt Alipay’s micro-lending business and provide the unbanked with financial services, while also drawing back deposits for commercial banks.

Ant’s IPO exposes fault lines in the digital payment industry, and China’s central bank is motivated to launch the digital yuan and give itself more power to keep third-party payment platforms in check, Tanvi Ratna, CEO of fintech think tank Policy 4.0, said. Policy 4.0 has been working on an extensive research report on China’s national digital currency that will be released on Nov 18.

The Shanghai and Hong Kong stock exchanges halted Ant’s $35 billion dual IPO last week after China’s financial regulators raised concerns over Ant’s booming micro-lending business, which could add more debt to the country’s highly leveraged economy. 

Ant’s co-lending subsidiary Huabei, which is a built-in virtual credit card in Alipay, facilitates loans between commercial banks and borrowers, while Jiabei is the short-term consumer loan provider. Though it enjoys as much as a 40% cut of loan interest, Alipay bears far less in credit risk than the banks. Only 2% of the loans Ant had facilitated as of June were on its balance sheet, according to its IPO prospectus

One way for the central bank to control Alipay’s lending business is to require the company to convert cash into the digital yuan to underwrite consumer loans. 

“The bank can make it more costly for digital payment platforms to use the digital yuan to lend money, and this might be something the government might want to force,” Ratna said. 

One day before Ant’s IPO, China’s top financial regulators published a consultation paper to require online lenders to provide at least 30% of any loan they fund jointly with banks, making it more difficult for Ant to lend money.....


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"China’s Digital Currency"
"China is testing a national digital currency — one piece in Xi’s bid for global influence"