China’s Central Bank has recently launched an homegrown digital currency as part of its effort to boost up electronic payments system. This also means that China has become the first major superpower to boast of its own digital currency.
According to People’s Bank of China, the intention of digital currency is to limit the cash in circulation with an aim to reign in money laundering and promote digital payments.The trials of digital currency have been introduced as part of pilot project across four cities-Shenzhen, Suzhou, Chengdu and Xiong’an.
The digital currency will have features similar to a “mined” cryptocurrency that uses blockchain technology with distributed ledger . But as the regular blockchain uses decentralized system with anonymity, the digital yuan will be circulated through legal banking channels. The details regarding users privacy remain unclear.
With its research in the area for more than five years and subsequent launch, the digital currency may serve as a key element in establishing what we can term as ‘Chinese might’. A dominant force in global politics and economy, China’s emergence as a leader in global crytpocurrency was but inevitable. The digital currency can be seen as a concerted measure to shore up its efforts to promote Chinese Renminbi(RMB) as an alternative especially to the US Dollar. This can be understood from the following: Firstly, introduction of Chinese Renminbi under IMF’s Special Drawing Rights(SDR) in 2016 alongside US Dollar, Euro,British Pound and Yen. Secondly, use of global financial centres like Taiwan, Hong Kong and Singapore in internationalisation of RMB. As a result of which more and more global indices like MSCI,FTSE have begun to include Chinese bonds and equities. Thirdly, introduction of CIPS(cross border interbank payments system) as an alternative to SWIFT in offering RMB based clearing and settlement services. And finally, the introduction of sovereign digital currency called digital yuan.
As the global economy reels with Covid-19 and a recession as its aftermath, the digital currency move by China can also be seen as a masterstroke in promoting technology as the major enabler in the global financial system. Where does that leave the West and the US? Is it the beginning of an end of USD hegemony? How will the US respond to the challenge?Will there be a Bretton Woods moment in the digital financial system?
As the world stares into uncertainty ,China with the first mover advantage is clearly far ahead than any of its global peers. The Dragon is surely breathing fire.