China’s Digital Currency

  • IASbaba
  • April 5, 2021
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  • GS-2: Effect of policies and politics of developed and developing countries on India’s interests 
  • GS-3: Science and Technology- developments and their applications and effects in everyday life. 

China’s Digital Currency

Context: China in February 2021 launched the latest round of pilot trials of its new digital currency, with reported plans of a major roll-out by the end of the year and ahead of the Winter Olympics in Beijing in February 2022. 

While several countries have been experimenting with digital currencies, China’s recent trials in several cities have placed it ahead of the curve and offered a look into how a central bank-issued digital tender may impact the world of digital payments.

About China’s Digital Currency 

  • Officially titled the Digital Currency Electronic Payment (DCEP), the digital RMB (or Renminbi, China’s currency) is, as its name suggests, a digital version of China’s currency. 
  • It can be downloaded and exchanged via an application authorised by the People’s Bank of China (PBOC), China’s central bank. 
  • China is among a small group of countries that have begun pilot trials; others include Sweden, South Korea and Thailand.

How is it different from an e-wallet? 

  • Unlike an e-wallet such as Paytm in India, or Alipay or WeChat Pay in China, the Digital RMB does not involve a third party. 
  • For users, the experience may broadly feel the same. But from a legal perspective, the digital currency is different. This is legal tender guaranteed by the central bank, not a payment guaranteed by a third-party operator. 
  • There is no third-party transaction, and hence, no transaction fee. 
  • Unlike e-wallets, the digital currency does not require Internet connectivity. The payment is made through Near-field Communication (NFC) technology. 
  • Also, unlike non-bank payment platforms that require users to link bank accounts, this can be opened with a personal identification number, which means “China’s unbanked population could potentially benefit”.

How widely is it being used in China? 

  • Following trials launched last year shortly after the COVID-19 pandemic struck, 4 million transactions worth $300 million had used the Digital RMB, the PBOC said in November. 
  • In the latest round of trials in February to coincide with the Chinese New Year holiday, Beijing distributed around $1.5 million of the currency to residents via a lottery, with “virtual red envelopes” worth 200 RMB each (around $30) sent to each resident. 
  • Shenzhen and Suzhou were other cities that distributed currency as part of pilot trials, which the Ministry of Commerce said will be expanded in coming months, with a wider roll-out expected before the Winter Olympics.

What are the reasons behind the push? 

  • Tame Private dominating Digital Payment Market: While digital payment platforms have helped to facilitate commerce in China, they have placed much of the country’s money into the hands of a few technology companies.
  • By 2019, Alibaba (which is behind Alipay) controlled 55.1% of the market for mobile payments in China. Tencent (which owns WeChat Pay) controlled another 38.9%.
  • The trials by Chinese authorities coincided with moves by Chinese regulators to tame some of its Internet giants, like Alibaba and Tencent.
  • Financial Stability: A key objective of China’s sovereign digital currency was “to maintain financial stability should ‘something happen’ to Alipay and WeChat Pay.
  • Counter rise of Cryptocurrencies: Chinese regulators have also warily viewed the rise of cryptocurrencies. The central bank-issued digital RMB will turn the logic of decentralised cryptocurrencies on its head, without the privacy and anonymity they offer, by giving regulators complete control over transactions. 
  • Global motivations: Beyond China’s borders, DCEP could help facilitate the internationalisation of the renminbi.

Connecting the dots:

  • Blockchain Technology

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