Is anyone surprised that it is the People’s Republic of China that is leading the global race to develop an electronic currency? By creating the regulatory framework, the government enables its country’s smart minds to have enough fun churning out more and more new ideas. And it provides enough money to keep those ideas from fizzling out. The electronic yuan is all set to be used as a means of payment at the 2022 Winter Olympics.
That’s why it was about time for Europe to think more intensively about a digital euro, according to our guest commentator Nils Beier. Nevertheless, Europe would be well-advised not to rush through but to shape the regulatory framework to preserve its citizens’ fundamental rights and privacy. The challenge now is to play out the strengths of liberal societies. Not necessarily a strength of the Chinese government.
This probably applies equally to dealing with Chinese threat potential, which the Europeans – finally, I would say – have recognized and are also voicing openly. “China is willing to use economic sanctions to change EU policy,” is the verdict of the European Council on Foreign Relations report, examined by our EU expert Amelie Richter.
Also, there is some astounding news from Senegal regarding China. And once again, sad news from Hong Kong which you can read for yourself.
Have a nice day,
It becomes clear on the first few pages who has the greatest threat potential: “China is willing to use economic punishment to change EU policy,” according to a report by the European Council on Foreign Relations (ECFR) published on Wednesday. Russia, Turkey, and the US, too, are using economic pressure – the stronger China gets, the “more likely and more consequential” Chinese economic coercion will become in return.
Brussels wants to protect itself against politically motivated punitive tariffs, boycotts, and sanctions. The Commission is therefore planning to introduce a corresponding anti-coercion instrument (ACI for short). The ECFR paper now provides proposals as to what the instrument could include and what needs to be considered when imposing it. The ECFR task force received support from European business representatives, parliamentarians, and top officials from Germany, France, the Netherlands, Spain, Sweden, and the Czech Republic.
The task force – which has a direct hearing with the EU Trade Directorate – recommends, among other recommendations, the installation of an “EU Resilience Office“: The new EU authority could keep track of potential economic coercion attempts by third countries and assess them before any steps are taken. “During the assessment, the EU should coordinate closely with member state governments to determine whether withholding a particular good or service from the coercing third country would be the most effective response, or at least part of it,” according to experts.
If it is clear that there is a case of economic coercion, countermeasures are a possible option: These could include restrictions on trade and investment, export controls, as well as restrictions on access to EU public procurement markets, or exclusion from EU programs. However, the authors note: “Europe may not impress a country such as China with threats of tariffs or trade curbs.” Therefore the EU should consider using the ACI to specifically cover countermeasures that could hit the “main strategic as well as short-term concrete interests” of a “third country” in a given sector. One critical lever for the EU could lie in the containment of technology transfers or the withholding of data.
However, the authors diminish the current potential effect: Other powers would be unlikely to believe that the EU is actually acting resolutely. To put it plainly: At present, the EU lacks credibility, the report concludes. This is because some of the responsibilities lie with the member states and not with the Brussels authority. The EU hardly succeeds in building a “coalition of the willing” to impose countermeasures on a large scale. In short: So far, it lacked bite. However, the US and China have not taken European threats seriously up to this point.
However, the ECFR experts warn against a too hasty approach: The envisaged mechanism is “associated with considerable risks”. There is a risk that the new instrument will ultimately do more harm than good. The experts warn of “significant economic impact on European trade and businesses” should the EU resort to harsh countermeasures. There could be a potential threat of tit-for-tat scenarios. “China could further weaponize access to its market for key European exports,” experts say. The US could threaten to withdraw intelligence support in areas where Europeans lacked capacity.
Deterrence rather than attack. To avoid this, the task force recommends two things: first, strengthening the EU’s internal market and European competitiveness to reduce Europe’s dependence and prevent third countries from exploiting bottlenecks. Secondly, to minimize risk, the ACI should primarily have a defensive character – the mechanism should not become a weapon the EU can use to start an economic war. The ACI should “depoliticize” economic conflicts, the ECFR task force stresses. The mechanism should be used as a “last resort” with effective levers for de-escalation at the ready.
The European Commission attaches great importance to the task force’s work: The ACI is urgently needed, said the head of the influential Directorate-General for Trade, Sabine Weyand, at the presentation of the report. The legislative proposal of the Brussels authority is expected for winter. At the moment, it is a matter of “fine-tuning”. The possibility of restricting access to intellectual property is being examined. Weyand said that she was rather skeptical about export controls within the framework of the ACI.
“The EU will not shoot from the hip,” the director-general said. Above all, she stressed the planned instrument’s deterrent nature. This was more a reaction to “where others already are”. The EU cannot stand by and watch others use trade as a weapon, she said. If the ACI is sufficiently deterrent, at best, it will never have to be used, Weyand said. Answers to complex questions also still need to be found, Weyand said. For example: What happens if a company pulls out of a region with forced labor because of sustainable supply chain requirements and then becomes the target of sanctions? “Does the company then have to be compensated? We are still working on these points,” says Weyand.
There is also support for the direction of the planned mechanism from the German industry, for example, the German Mechanical Engineering Industry Association (VDMA). “In the opinion of the VDMA, the principle of defense through deterrence must be the general guideline for the planned instruments, combined with the protection of the affected companies,” Ulrich Ackermann, the head of foreign trade, announced.
After China’s Prime Minister Li Keqiang called on unemployed compatriots to make a living as street vendors last year, it took only a few days for the state media to abandon its initial support. Why? Nobody knows; one can only guess. Li is considered an opponent of President Xi Jinping in the Communist Party’s Politburo. Shortly before, Xi had announced that the People’s Republic was well on the way to achieving the goal of a “moderately prosperous society” with 400 million middle-class citizens. Li, on the other hand, reminded the audience that 600 million Chinese have to get by on a monthly income of $140 (China.Table reported).
Both statements would trigger debates in democratic parties about which side to prefer when approaching the issue to make better policies, not so in the Chinese Communist Party. When Li’s approach was brushed off in public, it was clear that it could not be done without the explicit consent of more powerful currents in the Communist Party. As Prime Minister, Li is nominally number two in the party’s tightest circle of power. So did Xi put his foot down?
The assumption is obvious because the two politicians come from different factions which shared control of the state and the party since Mao Zedong’s death. Li is an upstart from the Tuanpai, the party’s youth organization, a proven path to advancement, especially for members of socially weaker classes. Xi, on the other hand, has his roots in the country’s influential elite, consisting mainly of representatives of business interests in the coastal provinces centered on Shanghai. Some of their representatives are among the so-called princelings, the descendants of the first generation of senior party cadres, like Xi.
The network of politicians forms the basis for their advancement in the party apparatus. “It is certainly possible to climb the greasy pole in the Communist Party even without belonging to a particular faction. But to get to the top, it might not be enough without the help of these groups,” says Marc-Oliver Rieger, a China researcher and director of the Confucius Institute at the University of Trier. But Rieger also admits that the view from the outside is not enough to really understand what is going on inside the party in concrete terms. Who are allies? Who are enemies? And why? “The inner workings of the power center remain a black box for us. There’s often nothing left for us to do but idle speculation,” says Rieger.
Depending on how one sorts, individual actors can be placed in different blocks. A simple categorization into only two factions, therefore, falls short. Xi Jinping, however, has managed to push the two classic camps into the background and instead creates something close to a very own faction, which could be called the Xi faction. Thanks to a political purge that is being sold to the public as an anti-corruption campaign, the party leader has checkmated opponents from both camps and thus also weakened both groups.
On the seven-member Politburo Standing Committee, Li Keqiang is one of two remaining Tuanpai. Xi has arrested rivals in his own ranks, such as the former security chief Zhou Yongkang from the Shanghai clique or the charismatic princeling Bo Xilai. Senior military leaders also fell victim to the campaign. “Xi has created the basis for himself to be able to fill the Politburo with two-thirds of his followers. His position seems to be very stable at the moment because of this,” says researcher Rieger.
The best evidence of this is the decision of the National People’s Congress in 2018 to amend the constitution to remove the two-term limit on the presidency, thus paving the way for a possible head of state Xi until 2040 and beyond. Parliament had no choice but to reject the constitutional amendment because, in a dictatorship like China’s, it must nod to the will of the bosses rather than form opposition.
Yet because the stability of authoritarian systems is built primarily on mutual mistrust, there are also plenty of dangers lurking for the strong man in China. Even Xi can’t afford too many missteps because his current supporters could use his weakness to their advantage tomorrow. Even Mao Zedong, who led the People’s Republic with an iron hand, was booted out by his comrades-in-arms after the failed Great Leap Forward in the early 1960s before he seized power again by launching the Cultural Revolution.
It’s not even out of the question that cross-factional liberal heads will join forces because they think the party leader’s course is wrong. China’s appearance in the world has long since left the realm of self-confidence. Instead, Chinese diplomats often come across as aggressive and arrogant. They can be sure of Beijing’s support at times. Whether the increasingly confrontational tone is the right way to achieve China’s position in the world as a respected superpower, not every cadre is convinced. Xi makes no secret of the fact that he is aware of forces in the party that want to wrest power from him. In public, however, the power struggle is portrayed as an attack on the country’s security and its people.
But it’s hard to see where the danger for Xi is most likely to lurk. On the other hand, the party leader did not only make friends. The distribution of power is a zero-sum game. The more Xi seizes, the more others have to give away. In the Tuanpai camp, for example, enthusiasm about Xi’s life-long term in office is likely to be limited because for the Youth League, it means having to do without a shot at an executive position for the time being. So was it a coincidence that Premier Li gave a button-pushing middle-finger approval to the National Security Bill for Hong Kong in the 2020 National People’s Congress? Or was he trying to signal his displeasure with it? “Whole theories are spun around this gesture,” says Rieger, “because the differences between the camps are also perceived in China. But it also shows how much interpretation is necessary if you want to understand the circumstances.”
Worldwide, almost all central banks are working on developing and introducing central bank digital currency (CBDC). This digital currency is to be made available to consumers, businesses, commerce, and the economy as an alternative to cash. However, there are even more reasons for the central banks’ commitment: On the one hand, with CBDC, they are reacting to the current technology-driven developments in payment transactions and want to counter the spread of private, alternative digital payment systems, such as Bitcoin or Facebook Diem. On the other hand, the goal is to support the digitalization of the economy and preserve the state’s own monetary sovereignty and relevance in international payments.
With the exception of the Bahamas, which launched the digital “sand dollar” last year, China is expected to be the first major economy to introduce a digital central bank currency known as e-CNY (China.Table reported). The Middle Kingdom is thus seizing an early opportunity to play a significant – digital – role in international payments in the future.
China is already one of the world’s leading digital countries when it comes to cashless payments within its own economic area. The government wants to build on this pioneering role with the development of the digital renminbi (DCEP – Digital Currency Electronic Payment) and has been vehemently pushing the development of the e-CNY since 2016. In order to achieve this, the Chinese central bank founded the PBoC Digital Currency Research Institute in June 2017, which is responsible for the design and development of the e-CNY.
The Chinese government has stated that a leading role in developing global technology standards – especially in the payment sector – will increase China’s competitiveness and boost the economy. However, e-CNY is intended to provide a technology boost and advance the country’s competitiveness and expand its own room for maneuver vis-à-vis large local digital technology companies such as Tencent or Alibaba. With WeChat Pay and Alipay, the latter dominates the digital payment market and has thus basically created an alternative financial system in China that can be used relatively independently of the central bank.
Therefore, the government is very interested in not leaving the entire field to commercial payment providers and possibly losing control. Access to valuable data on the payment flows and user behavior of the population is important here. It also aims to build on its status as a global driver in the development of digital payment systems and become a technology leader in blockchain. The development of cross-border financial innovations and the possibility of concluding contracts with partner countries on a yuan basis instead of a US dollar basis should also become possible with e-CNY. This would ultimately also make China less dependent on any US sanctions.
The first round of e-CNY pilot programs has already been conducted by the People’s Bank of China (PBoC). By March this year, the PBoC had conducted seven e-CNY tests, distributing a total of 160 million e-CNY (about $24.6 million). More than half a million people have received e-CNY so far, and tests in other areas are expected to follow. The PBoC is pursuing the ambitious goal of rolling out the digital yuan on a large scale at the 2022 Beijing Winter Olympics venues.
China is pursuing a centralist approach in the design of CBDC. This means that anyone who wants to make digital payments in China in the future will not be able to avoid the digital yuan. However, even without e-CNY, the Chinese state has ways to track money flows. Most mobile payments or foreign exchange transactions go through the central clearing platform NetUnion or the China Foreign Exchange Trade System. This means that even without e-CNY, the Chinese financial supervisory authority can see how money is being spent in real time.
Technical details on e-CNY are few and far between. According to the PBoC, the benefits of e-CNY include protection of user privacy, improved tracking, lower transaction costs, and simplification of cross-border payments. According to the PBoC, e-CNY will be a legal tender to replace or supplement cash in a centralized and two-tier issuance and distribution system. Legally, its functions and characteristics are equal to cash. It will be issued by Chinese commercial banks, distributing the digital money via an app. A corresponding deposit with the PBoC backs this money. The app is designed to operate “dual offline” without network connections, meaning both the payer and the payee are in an offline mode. Presumably, no interest will be paid on e-CNY, and the amount of how much e-CNY each citizen can receive is also likely to be limited.
The US central bank, the Federal Reserve (Fed), sees less urgency in developing and introducing the e-dollar. As Chair of the Federal Reserve Jerome Powell recently pointed out during an online discussion at the Bank for International Settlements (BIS), the US central bank is not even at a “decision-making” stage. While the Fed is considering adoption and exploring potential benefits and risks, it does not have the ambition to pioneer it. Security is a top priority for Americans. The Fed also still lacks the support of Congress, which Powell said has yet to give the green light. There are also a few private sector initiatives on the digital dollar. For example, according to the Initiative Digital Dollar Project, some pilot projects on the e-dollar are set to launch in the coming months, which will also explore the potential benefits of digital central bank money. So far, US thinking on CBDC has relied on surveys from other countries. Only now do they want to start collecting their own data.
The EU is positioning itself between a centralized and a voluntary approach. In the middle of the year, the European Central Bank (ECB) will decide whether or not the e-euro will be introduced. Unlike the US Federal Reserve, the ECB has been looking at the possibilities and benefits of a digital euro for some time. Already in 2019, ECB chief Christine Lagarde established an internal task force on the digital euro. Important issues for the Europeans include data protection and anonymity in transactions. Overall, the EU still faces some challenges related to CBDC. For example, almost 70 percent of all retail transactions in the EU are still made in cash. But it is not only the issuance of CBDC in private consumption that is a priority for the EU; digital central bank money is also to be used in industry and digital business models. Here, the use in pay-per-use models or the field of machine-to-machine payments should be mentioned above all.
China has already taken giant steps forward and is well on its way to winning the race of adopting a digital currency and becoming a technological leader in this field. But for all of China’s haste, the question remains whether Western governments and central banks can gain valuable insights from China’s e-CNY tests. After all, the Chinese system is unusual in many respects – from its tightly controlled financial system to strict capital account regulations to the huge volume of mobile payments.
However, with Europe lagging further behind in the field of digital payment services, the ECB is now picking up speed on the digital euro. Not least to set the course for the Internet of Things (IoT) at an early stage and not fall behind in the industrial environment. Banks and the private sector are already working on their own solutions here. Hesitation could open up the potential to other global technology companies and leave the exciting field of digital currencies to players from outside the industry.
Dr. Nils Beier, Managing Director, Head of Strategy for Banks and Public Sector at Accenture in DACH.
The lotus flower is part and parcel of the China cliché. In fact, they can be found in large numbers – and here in Anlong, a county in the southwest of Guizhou province, they have overgrown the entire lake. Just like in the famous arithmetic problem that can be used to illustrate the effect of the exponential function. The pond is known to become overgrown much faster than you think.
Is anyone surprised that it is the People’s Republic of China that is leading the global race to develop an electronic currency? By creating the regulatory framework, the government enables its country’s smart minds to have enough fun churning out more and more new ideas. And it provides enough money to keep those ideas from fizzling out. The electronic yuan is all set to be used as a means of payment at the 2022 Winter Olympics.
That’s why it was about time for Europe to think more intensively about a digital euro, according to our guest commentator Nils Beier. Nevertheless, Europe would be well-advised not to rush through but to shape the regulatory framework to preserve its citizens’ fundamental rights and privacy. The challenge now is to play out the strengths of liberal societies. Not necessarily a strength of the Chinese government.
This probably applies equally to dealing with Chinese threat potential, which the Europeans – finally, I would say – have recognized and are also voicing openly. “China is willing to use economic sanctions to change EU policy,” is the verdict of the European Council on Foreign Relations report, examined by our EU expert Amelie Richter.
Also, there is some astounding news from Senegal regarding China. And once again, sad news from Hong Kong which you can read for yourself.
Have a nice day,
It becomes clear on the first few pages who has the greatest threat potential: “China is willing to use economic punishment to change EU policy,” according to a report by the European Council on Foreign Relations (ECFR) published on Wednesday. Russia, Turkey, and the US, too, are using economic pressure – the stronger China gets, the “more likely and more consequential” Chinese economic coercion will become in return.
Brussels wants to protect itself against politically motivated punitive tariffs, boycotts, and sanctions. The Commission is therefore planning to introduce a corresponding anti-coercion instrument (ACI for short). The ECFR paper now provides proposals as to what the instrument could include and what needs to be considered when imposing it. The ECFR task force received support from European business representatives, parliamentarians, and top officials from Germany, France, the Netherlands, Spain, Sweden, and the Czech Republic.
The task force – which has a direct hearing with the EU Trade Directorate – recommends, among other recommendations, the installation of an “EU Resilience Office“: The new EU authority could keep track of potential economic coercion attempts by third countries and assess them before any steps are taken. “During the assessment, the EU should coordinate closely with member state governments to determine whether withholding a particular good or service from the coercing third country would be the most effective response, or at least part of it,” according to experts.
If it is clear that there is a case of economic coercion, countermeasures are a possible option: These could include restrictions on trade and investment, export controls, as well as restrictions on access to EU public procurement markets, or exclusion from EU programs. However, the authors note: “Europe may not impress a country such as China with threats of tariffs or trade curbs.” Therefore the EU should consider using the ACI to specifically cover countermeasures that could hit the “main strategic as well as short-term concrete interests” of a “third country” in a given sector. One critical lever for the EU could lie in the containment of technology transfers or the withholding of data.
However, the authors diminish the current potential effect: Other powers would be unlikely to believe that the EU is actually acting resolutely. To put it plainly: At present, the EU lacks credibility, the report concludes. This is because some of the responsibilities lie with the member states and not with the Brussels authority. The EU hardly succeeds in building a “coalition of the willing” to impose countermeasures on a large scale. In short: So far, it lacked bite. However, the US and China have not taken European threats seriously up to this point.
However, the ECFR experts warn against a too hasty approach: The envisaged mechanism is “associated with considerable risks”. There is a risk that the new instrument will ultimately do more harm than good. The experts warn of “significant economic impact on European trade and businesses” should the EU resort to harsh countermeasures. There could be a potential threat of tit-for-tat scenarios. “China could further weaponize access to its market for key European exports,” experts say. The US could threaten to withdraw intelligence support in areas where Europeans lacked capacity.
Deterrence rather than attack. To avoid this, the task force recommends two things: first, strengthening the EU’s internal market and European competitiveness to reduce Europe’s dependence and prevent third countries from exploiting bottlenecks. Secondly, to minimize risk, the ACI should primarily have a defensive character – the mechanism should not become a weapon the EU can use to start an economic war. The ACI should “depoliticize” economic conflicts, the ECFR task force stresses. The mechanism should be used as a “last resort” with effective levers for de-escalation at the ready.
The European Commission attaches great importance to the task force’s work: The ACI is urgently needed, said the head of the influential Directorate-General for Trade, Sabine Weyand, at the presentation of the report. The legislative proposal of the Brussels authority is expected for winter. At the moment, it is a matter of “fine-tuning”. The possibility of restricting access to intellectual property is being examined. Weyand said that she was rather skeptical about export controls within the framework of the ACI.
“The EU will not shoot from the hip,” the director-general said. Above all, she stressed the planned instrument’s deterrent nature. This was more a reaction to “where others already are”. The EU cannot stand by and watch others use trade as a weapon, she said. If the ACI is sufficiently deterrent, at best, it will never have to be used, Weyand said. Answers to complex questions also still need to be found, Weyand said. For example: What happens if a company pulls out of a region with forced labor because of sustainable supply chain requirements and then becomes the target of sanctions? “Does the company then have to be compensated? We are still working on these points,” says Weyand.
There is also support for the direction of the planned mechanism from the German industry, for example, the German Mechanical Engineering Industry Association (VDMA). “In the opinion of the VDMA, the principle of defense through deterrence must be the general guideline for the planned instruments, combined with the protection of the affected companies,” Ulrich Ackermann, the head of foreign trade, announced.
After China’s Prime Minister Li Keqiang called on unemployed compatriots to make a living as street vendors last year, it took only a few days for the state media to abandon its initial support. Why? Nobody knows; one can only guess. Li is considered an opponent of President Xi Jinping in the Communist Party’s Politburo. Shortly before, Xi had announced that the People’s Republic was well on the way to achieving the goal of a “moderately prosperous society” with 400 million middle-class citizens. Li, on the other hand, reminded the audience that 600 million Chinese have to get by on a monthly income of $140 (China.Table reported).
Both statements would trigger debates in democratic parties about which side to prefer when approaching the issue to make better policies, not so in the Chinese Communist Party. When Li’s approach was brushed off in public, it was clear that it could not be done without the explicit consent of more powerful currents in the Communist Party. As Prime Minister, Li is nominally number two in the party’s tightest circle of power. So did Xi put his foot down?
The assumption is obvious because the two politicians come from different factions which shared control of the state and the party since Mao Zedong’s death. Li is an upstart from the Tuanpai, the party’s youth organization, a proven path to advancement, especially for members of socially weaker classes. Xi, on the other hand, has his roots in the country’s influential elite, consisting mainly of representatives of business interests in the coastal provinces centered on Shanghai. Some of their representatives are among the so-called princelings, the descendants of the first generation of senior party cadres, like Xi.
The network of politicians forms the basis for their advancement in the party apparatus. “It is certainly possible to climb the greasy pole in the Communist Party even without belonging to a particular faction. But to get to the top, it might not be enough without the help of these groups,” says Marc-Oliver Rieger, a China researcher and director of the Confucius Institute at the University of Trier. But Rieger also admits that the view from the outside is not enough to really understand what is going on inside the party in concrete terms. Who are allies? Who are enemies? And why? “The inner workings of the power center remain a black box for us. There’s often nothing left for us to do but idle speculation,” says Rieger.
Depending on how one sorts, individual actors can be placed in different blocks. A simple categorization into only two factions, therefore, falls short. Xi Jinping, however, has managed to push the two classic camps into the background and instead creates something close to a very own faction, which could be called the Xi faction. Thanks to a political purge that is being sold to the public as an anti-corruption campaign, the party leader has checkmated opponents from both camps and thus also weakened both groups.
On the seven-member Politburo Standing Committee, Li Keqiang is one of two remaining Tuanpai. Xi has arrested rivals in his own ranks, such as the former security chief Zhou Yongkang from the Shanghai clique or the charismatic princeling Bo Xilai. Senior military leaders also fell victim to the campaign. “Xi has created the basis for himself to be able to fill the Politburo with two-thirds of his followers. His position seems to be very stable at the moment because of this,” says researcher Rieger.
The best evidence of this is the decision of the National People’s Congress in 2018 to amend the constitution to remove the two-term limit on the presidency, thus paving the way for a possible head of state Xi until 2040 and beyond. Parliament had no choice but to reject the constitutional amendment because, in a dictatorship like China’s, it must nod to the will of the bosses rather than form opposition.
Yet because the stability of authoritarian systems is built primarily on mutual mistrust, there are also plenty of dangers lurking for the strong man in China. Even Xi can’t afford too many missteps because his current supporters could use his weakness to their advantage tomorrow. Even Mao Zedong, who led the People’s Republic with an iron hand, was booted out by his comrades-in-arms after the failed Great Leap Forward in the early 1960s before he seized power again by launching the Cultural Revolution.
It’s not even out of the question that cross-factional liberal heads will join forces because they think the party leader’s course is wrong. China’s appearance in the world has long since left the realm of self-confidence. Instead, Chinese diplomats often come across as aggressive and arrogant. They can be sure of Beijing’s support at times. Whether the increasingly confrontational tone is the right way to achieve China’s position in the world as a respected superpower, not every cadre is convinced. Xi makes no secret of the fact that he is aware of forces in the party that want to wrest power from him. In public, however, the power struggle is portrayed as an attack on the country’s security and its people.
But it’s hard to see where the danger for Xi is most likely to lurk. On the other hand, the party leader did not only make friends. The distribution of power is a zero-sum game. The more Xi seizes, the more others have to give away. In the Tuanpai camp, for example, enthusiasm about Xi’s life-long term in office is likely to be limited because for the Youth League, it means having to do without a shot at an executive position for the time being. So was it a coincidence that Premier Li gave a button-pushing middle-finger approval to the National Security Bill for Hong Kong in the 2020 National People’s Congress? Or was he trying to signal his displeasure with it? “Whole theories are spun around this gesture,” says Rieger, “because the differences between the camps are also perceived in China. But it also shows how much interpretation is necessary if you want to understand the circumstances.”
Worldwide, almost all central banks are working on developing and introducing central bank digital currency (CBDC). This digital currency is to be made available to consumers, businesses, commerce, and the economy as an alternative to cash. However, there are even more reasons for the central banks’ commitment: On the one hand, with CBDC, they are reacting to the current technology-driven developments in payment transactions and want to counter the spread of private, alternative digital payment systems, such as Bitcoin or Facebook Diem. On the other hand, the goal is to support the digitalization of the economy and preserve the state’s own monetary sovereignty and relevance in international payments.
With the exception of the Bahamas, which launched the digital “sand dollar” last year, China is expected to be the first major economy to introduce a digital central bank currency known as e-CNY (China.Table reported). The Middle Kingdom is thus seizing an early opportunity to play a significant – digital – role in international payments in the future.
China is already one of the world’s leading digital countries when it comes to cashless payments within its own economic area. The government wants to build on this pioneering role with the development of the digital renminbi (DCEP – Digital Currency Electronic Payment) and has been vehemently pushing the development of the e-CNY since 2016. In order to achieve this, the Chinese central bank founded the PBoC Digital Currency Research Institute in June 2017, which is responsible for the design and development of the e-CNY.
The Chinese government has stated that a leading role in developing global technology standards – especially in the payment sector – will increase China’s competitiveness and boost the economy. However, e-CNY is intended to provide a technology boost and advance the country’s competitiveness and expand its own room for maneuver vis-à-vis large local digital technology companies such as Tencent or Alibaba. With WeChat Pay and Alipay, the latter dominates the digital payment market and has thus basically created an alternative financial system in China that can be used relatively independently of the central bank.
Therefore, the government is very interested in not leaving the entire field to commercial payment providers and possibly losing control. Access to valuable data on the payment flows and user behavior of the population is important here. It also aims to build on its status as a global driver in the development of digital payment systems and become a technology leader in blockchain. The development of cross-border financial innovations and the possibility of concluding contracts with partner countries on a yuan basis instead of a US dollar basis should also become possible with e-CNY. This would ultimately also make China less dependent on any US sanctions.
The first round of e-CNY pilot programs has already been conducted by the People’s Bank of China (PBoC). By March this year, the PBoC had conducted seven e-CNY tests, distributing a total of 160 million e-CNY (about $24.6 million). More than half a million people have received e-CNY so far, and tests in other areas are expected to follow. The PBoC is pursuing the ambitious goal of rolling out the digital yuan on a large scale at the 2022 Beijing Winter Olympics venues.
China is pursuing a centralist approach in the design of CBDC. This means that anyone who wants to make digital payments in China in the future will not be able to avoid the digital yuan. However, even without e-CNY, the Chinese state has ways to track money flows. Most mobile payments or foreign exchange transactions go through the central clearing platform NetUnion or the China Foreign Exchange Trade System. This means that even without e-CNY, the Chinese financial supervisory authority can see how money is being spent in real time.
Technical details on e-CNY are few and far between. According to the PBoC, the benefits of e-CNY include protection of user privacy, improved tracking, lower transaction costs, and simplification of cross-border payments. According to the PBoC, e-CNY will be a legal tender to replace or supplement cash in a centralized and two-tier issuance and distribution system. Legally, its functions and characteristics are equal to cash. It will be issued by Chinese commercial banks, distributing the digital money via an app. A corresponding deposit with the PBoC backs this money. The app is designed to operate “dual offline” without network connections, meaning both the payer and the payee are in an offline mode. Presumably, no interest will be paid on e-CNY, and the amount of how much e-CNY each citizen can receive is also likely to be limited.
The US central bank, the Federal Reserve (Fed), sees less urgency in developing and introducing the e-dollar. As Chair of the Federal Reserve Jerome Powell recently pointed out during an online discussion at the Bank for International Settlements (BIS), the US central bank is not even at a “decision-making” stage. While the Fed is considering adoption and exploring potential benefits and risks, it does not have the ambition to pioneer it. Security is a top priority for Americans. The Fed also still lacks the support of Congress, which Powell said has yet to give the green light. There are also a few private sector initiatives on the digital dollar. For example, according to the Initiative Digital Dollar Project, some pilot projects on the e-dollar are set to launch in the coming months, which will also explore the potential benefits of digital central bank money. So far, US thinking on CBDC has relied on surveys from other countries. Only now do they want to start collecting their own data.
The EU is positioning itself between a centralized and a voluntary approach. In the middle of the year, the European Central Bank (ECB) will decide whether or not the e-euro will be introduced. Unlike the US Federal Reserve, the ECB has been looking at the possibilities and benefits of a digital euro for some time. Already in 2019, ECB chief Christine Lagarde established an internal task force on the digital euro. Important issues for the Europeans include data protection and anonymity in transactions. Overall, the EU still faces some challenges related to CBDC. For example, almost 70 percent of all retail transactions in the EU are still made in cash. But it is not only the issuance of CBDC in private consumption that is a priority for the EU; digital central bank money is also to be used in industry and digital business models. Here, the use in pay-per-use models or the field of machine-to-machine payments should be mentioned above all.
China has already taken giant steps forward and is well on its way to winning the race of adopting a digital currency and becoming a technological leader in this field. But for all of China’s haste, the question remains whether Western governments and central banks can gain valuable insights from China’s e-CNY tests. After all, the Chinese system is unusual in many respects – from its tightly controlled financial system to strict capital account regulations to the huge volume of mobile payments.
However, with Europe lagging further behind in the field of digital payment services, the ECB is now picking up speed on the digital euro. Not least to set the course for the Internet of Things (IoT) at an early stage and not fall behind in the industrial environment. Banks and the private sector are already working on their own solutions here. Hesitation could open up the potential to other global technology companies and leave the exciting field of digital currencies to players from outside the industry.
Dr. Nils Beier, Managing Director, Head of Strategy for Banks and Public Sector at Accenture in DACH.
The lotus flower is part and parcel of the China cliché. In fact, they can be found in large numbers – and here in Anlong, a county in the southwest of Guizhou province, they have overgrown the entire lake. Just like in the famous arithmetic problem that can be used to illustrate the effect of the exponential function. The pond is known to become overgrown much faster than you think.
