While many central banks are still exploring the possibility of issuing a digital currency, China has already been doing so since last year with a series of pilot projects. The eRMB (as I will call it instead of the more unwieldy official term “DC/EP”) will not in itself help challenge the global dominance of the US dollar. Rather, its true significance lies in its potential to alter the balance between China’s technology giants and its traditionally majority state-owned banks – thereby indirectly improving the banks’ international competitiveness.
The pilot projects are characterized by a two-tier structure with “controlled anonymity“. Here, the People’s Bank of China (PBoC), i.e. the central bank, issues its eRMB to an approved group of large state-owned banks and other selected financial institutions, which then make the money available to households and companies – ultimately the target groups of this digital currency. Unlike other digital currencies under discussion at central banks, Chinese firms and households do not maintain an eRMB account directly with the central bank, which protects it from potential disruptions.
The selected financial institutions will only see part of the digital footprint of the individuals or companies – for example, when they deposit or withdraw funds using eRMB – and should not keep the information longer than needed. This is the “anonymous” part of “controlled anonymity.” The “control part,” on the other hand, is that the credit union can see the entire history of a particular eRMB unit’s movement – and decide whether or not to share that information. Both the two-tier system and controlled anonymity are also likely to be central features of an eventual national program.
Digital Currency as a Gift
During the pilots, eRMB were distributed as digital gifts to randomly selected individuals. With widespread distribution, the government will be able to use several tools to encourage target groups to use the currency more. For example, it could pay the salaries of government employees and state-owned corporations-about 15 percent of the total workforce-and public pensions in eRMB. In addition, public procurement programs, transfers to low-income households, and subsidies to businesses could also take place in the new currency. And the government could require its citizens to pay an ever-increasing share of their income taxes and other public charges in eRMB.
How significant will the digital renminbi be? If it replaces physical notes and coins in China, it could replace some of the existing money and save the People’s Bank some of the printing and minting costs of new money, of which it currently puts several billion renminbi into circulation each year. Although such savings are helpful in social terms, they are unlikely to be very large compared with China’s national budget.
Nor will the eRMB completely eliminate illegal transactions by the Chinese underground economy, since criminals will then undoubtedly conduct their business by other means, such as dollars, euros, gold, or valuable works of art. (Over half of all physical US dollar notes, especially those over $100, circulate outside the United States, and often in the underground economy of other countries).
Fixing the Imbalance of Banks and Tech Companies
A considerably more significant consequence of the eRMB, but one that has not been publicly discussed among Chinese officials, is the possibility of altering the balance of power between the country’s banks and technology corporations .
The rise of digital conglomerates such as Ant Group, JD.com, and Baidu has created significant value for Chinese households and businesses. Households can access a wide range of investment products through digital “financial supermarkets,” even more conveniently than Americans. And millions of small business owners who would otherwise have no chance of bank loans have been able to finance their businesses without having to provide collateral.
The fact that such loans can be made reflects the ability of digital groups not only to consider the revenue growth of online businesses, but also to include “soft information” such as customer reviews of a company’s products and services and product return rates in their assessments. Such data-most of which is not available to banks-allows tech groups to get high-quality assessments of creditworthiness. Their vast amounts of data also allow these groups to process loan applications, distribute credit, and collect repayments much more cheaply and quickly than banks.
State Banks welcome Regulation
Regulators inside and outside China, however, increasingly fear that the big corporations could abuse these advantages. Traditional banks, which have lost market share to the tech giants in both money management and lending, are likely to be delighted with the increased regulatory scrutiny.
Via the controlled anonymity of the eRMB, the central bank would be given a similar opportunity to monitor what is normally invisible to banks. Although the central bank would still have to forego the other information, such as customer ratings, its data on sales and cost growth would be in some respects more valuable than that of the technology groups because it would include a transaction history that spans the economy. Thus, the credit union could assess the creditworthiness of potential borrowers and provide these assessments cheaply or for free to commercial banks, which could reduce or even eliminate the informational advantage of the technology groups.
Strengthen International Transactions in Renminbi
Whether the eRMB could be used internationally depends on several factors: As China’s global importance in trade and finance grows, more transactions will be booked in renminbi. State-owned Chinese firms may insist on settling some of their international transactions in renminbi, and the PBoC may enter into more swap agreements in the currency. But the currency’s international buoyancy is constrained by Chinese capital controls – as well as the relatively small amount of liquid renminbi-denominated fixed assets. On the other hand, reforms in these areas could boost the currency’s use.
US policy will also play a role. Authorities there, for example, could discourage American financial institutions from using the renminbi. Ironically, however, the constant US financial sanctions that exploit the dollar’s privileged position could encourage the adoption of alternatives – including the renminbi.
The eRMB alone will hardly contribute to the internationalisation of the renminbi. Its greatest effect will probably be a new balance of power between the banks and the large technology corporations in China itself.
Shang-Jin Wei, former Chief Economist at the Asian Development Bank, is Professor of Finance and Economics at Columbia Business School and the School of International and Public Affairs at Columbia University. Translated from English by Harald Eckhoff.
Copyright: Project Syndicate, 2021.