The digital reminbi and the global standard of "Central Bank digital currencies"
The blockchain infrastructure created by Beijing to build a stronger economic and political apparatus and attempt to reduce the hegemony of the dollar
Focus on China
G e N Iuvinale
“Digital civilization is a world where digital spaces create a community of shared destiny. The vast ocean of data, just like oil resources during industrialization, contains immense productive power and opportunity. Whoever controls big data technologies will control the resources for development and will have the upper hand.”
These words were spoken by Chinese President Xi Jinping, speaking at the first meeting of the Central Leading Group for Cybersecurity in 2014.
Since then a lot of time has passed and today's world is undergoing changes never seen before. A new technological revolution is underway. Data, especially big data, has become a new factor in production. Information technology has become a new peak of innovation. Networks have become the new infrastructure. The digital economy has become a new economic engine. Cybersecurity has become a new global challenge.
The Communist Party of China (CPC) regards territorial sovereignty and information sovereignty as indivisible. The concept of a “community of shared destiny for humanity” first appeared under Hu Jintao in 2007 and then in 2012 and has since evolved under Xi Jinping. For Xi, the concept embodies the idea that "a more active China in global affairs... could benefit the prosperity and well-being of people around the world and promote the reform and development [of] the global governance system."
This vision has dictated Beijing's foreign policy agenda and national strategy.
Decades of economic growth and government priority have placed Beijing at the center of global maritime trade as well. The policy of enhancing maritime connectivity has brought significant economic benefits to China and has increased Beijing's influence on the flow of goods around the world. China's power draws not only on the control of ports and routes, but also on the information technology of the Digital Silk Road, the development of fintech (financial technology) and its state digital currency, the e-CNY.
From the technical infrastructure of Digital Currency/Electronic Payment (DCEP), the state digital currency project of the People's Bank of China (PBOC), the digital renminbi (e-CNY) was created.
This new model enables the PBOC to track and analyze data associated with the transfer of liabilities and assets of financial companies. This is in line with the 2019 Fintech Development Plan directive to wrest control of “critical” financial infrastructure from private entities.
Digital Currency Electronic Payment is just one component of China's long-term strategy to develop an all-digital economy and lead the world into an intelligent data-driven future. The e-CNY currency is as much about data as it is about money.
This is primarily a domestic matter, but it is highly likely that this monetary policy will have an impact on foreign policy too, as China is pushing the rest of the world to follow its technological path. But in the long run, China's strategic approach to fintech will lay the groundwork that could give Beijing a major global economic advantage in the coming decades.
US and European financial policy makers are just starting to study a digital dollar or euro; China, on the other hand, is already in the full development of the digitization of the entire economy and of its state digital currency, the e-CNY.
In 2017, President Xi Jinping defined data as "a new factor of production, a fundamental and strategic resource [...] necessary to build a digital economy". The Chinese government is targeting digital information to power the infrastructure and applications that regulate daily life, enabling the state to use it for political and economic purposes.
While a digital renminbi cannot directly compete with the globally more stable and attractive US dollar in the near term, the digital currency's functionality could propel Beijing-led innovation within the global financial system. In fact, China's long-term strategy in the digital economy includes creating a "gold standard" in emerging digital technologies, which no country, not even the United States, is dominating.
The Chinese market has had digital and mobile payments for years, but a digital renminbi is a markedly different development. It allows users to directly hold a digital asset issued by the central bank and transferable between different banking and payment platforms. The e-CNY had a pilot phase in April 2020. To encourage citizens to pay using the digital currency, the government has thought of a particular initiative: a lottery that has put a total of 10 million up for grabs for around 50 thousand citizens digital yuan (1.2 million euros) to spend on daily expenses.
As of the end of June 2021, approximately 21 million people and 4 million businesses had e-CNY wallets and had carried out approximately 71 million transactions totaling $5.3 billion in digital RMB.
As of February 2022, more than 87.5 billion yuan (US$13.78 billion) worth of e-CNY transactions have been made, according to government data. In addition, over 10 million corporate portfolios had been created as of November 2021.
With over 100 million Chinese consumers already using this currency, the e-CNY has already crossed borders. The Bank for International Settlements (BIS) has launched a program, called the Multiple Central Bank Digital Currency Bridge (m-CBDC Bridge), which will allow e-CNY payments to be processed directly between China, Hong Kong and other countries, including such as Thailand and the United Arab Emirates.
The mBridge, which is still in the pilot stage, promises big benefits that will appeal to businesses and governments. It would allow international transfers to happen in seconds and the cost to users of such transactions could be cut by up to half. Payments with mBridge can take place at all hours of the day or night, eliminating the time zone mismatches that make "on delivery" payment impractical in transcontinental transactions. By enabling real-time verifiable payments, mBridge would dramatically reduce the risks and administrative burdens inherent in global trade. The mBridge project has made significant progress. As of 2021, twenty-two major international banks, including UBS, Standard Chartered and Société Général, had identified fifteen beneficial uses of mBridge in international trade, capital market transactions, digital corporate bond issuance, supply chain finance and trade finance programmable. Starting in 2022, Goldman Sachs will test issuance of tokenized bonds and HSBC programmable trade finance.
For example, the mBridge, by creating an alternative means of international trade, would make it more difficult for the West to enforce economic sanctions and investigate crime. The current dollar-based international exchange system is based on a global network of connected banks and communications known as SWIFT. Because the United States and allied countries dominate this system (a hub-and-spoke infrastructure in which most hubs depend on a presence in the West), they are able to impose sanctions and monitor money laundering and other crimes. Any bank that fails to comply diligently with Western demands risks being cut out of the system, with potentially major business implications. As an encrypted and opaque channel, outside Western jurisdictions, mBridge stands as an alternative solution.
In the near term, China could also use the currency and related infrastructure to circumvent US sanctions. A direct blockchain-based currency link could facilitate trade and support in places like Iran, Venezuela, and North Korea. It would also ease sanctions pressure on Russia, which has been dumping its USD reserves for years.
The digital renminbi is the CCP's tool to collect every byte of financial data to aggregate, analyze and exploit it to build a stronger economic and political apparatus. The goal is for money to be more "intelligent" to make the state more "intelligent", i.e. the CCP more powerful. As the world economy becomes more digitized, innovation will come through interpreting aggregate data, thereby also gaining an edge in global economic competition. The CCP understood the importance of this economic calculation. The Beijing government is also likely to transfer foreign and domestic data to Chinese companies to give them competitive advantages. One of the main components of China's defensive strategy against perceived Western containment is the construction of a global commodity trading system based on the yuan, in an attempt to enhance pricing power, reduce China's vulnerability in the trade in global resources and strengthen Beijing's global financial position. Major oil suppliers to China, such as Russia, Angola, Venezuela, Iran and Nigeria, now accept yuan for payments. The concept of "gas-yuan" was also proposed in the Chinese World Energy Development Report 2017. Given the fragmented nature of global natural gas markets and China's leverage as the major buyer, the emergence of a gas yuan is not a pipe dream. Russia, Iran and China collectively produce more liquefied natural gas (LNG) than the United States and all have non-dollar financial infrastructure.
Indeed, China's first yuan-denominated liquefied natural gas (LNG) deal was concluded in Shanghai on March 30, according to China National Offshore Oil Corporation (CNOOC), China's state-owned oil and gas company. This is an important step for China to explore cross-border yuan settlement transactions in the field of oil and gas trading. It is worth noting that the deal was concluded between CNOOC and France's Total Energy, trading was conducted through the Shanghai Oil and Natural Gas Exchange. In total, 65,000 LNG were sold, originating from the United Arab Emirates. China imported more than 500 million tons of crude oil and over 100 million tons of natural gas in 2022, with LNG amounting to 63.44 million tons, according to China's General Administration of Customs.
Another component of a Chinese-initiated financial system is the PBOC's Cross-Border Interbank Payment System (CIPS), implemented by the digital yuan. Launched in 2015, CIPS has grown into a financial infrastructure that could allow sanctioned entities to enter global markets. CIPS combines financial messaging services and settlement functions in a single platform. It is the Chinese alternative to the “SWIFT + CHIPS” (Society for Worldwide Interbank Financial Telecommunications and Clearing House Interbank Payments System) combination that moves the dollar between different institutions globally.
In addition, China's plan to set up a pool of yuan liquidity reserves with the Bank for International Settlements could help boost international use of the currency. According to analysts, China's plan, as well as Indonesia, Malaysia, Hong Kong, Singapore and Chile could pave the way for an anchoring role of the currency in the Asia-Pacific region. The announcement highlights the effort that the Chinese central bank is making to put in place infrastructures that help reduce the hegemony of the dollar.
On June 22, 2020, the Hong Kong-based newspaper South China Morning Post reported that Fang Xinghai, vice chairman of the China Securities Regulatory Commission, said that since China mainly relies on the US dollar payment system in international transactions, it would be vulnerable to possible sanctions by the United States.
“For a long time, the United States has occupied an absolute dominant position in the global monetary system, thereby establishing the strong position of the US dollar and controlling international regulatory and payment infrastructures. The US dollar accounts for more than 60% of global foreign exchange reserves and 90% of international capital transactions. The currencies of many countries are pegged to the US dollar and the interest rate market also follows the policy of those of the Fed. The US dollar is used by most countries as an instrument of quotation, payment and clearing in international transactions”. Fang Xinghai added that the United States controls the Society for Worldwide Interbank Financial Telecommunication (SWIFT) and the New York Clearing House Interbank Payment System (CHIPS).
SWIFT is a world-class financial messaging network, providing information transmission, payment and regulatory services for global financial institutions.
Even the Hoover Institution, in its 2022 report, points out how the e-CNY could ultimately "undermine the traditional dominance of the US dollar as the dominant reserve currency and source of geostrategic influence". it would also detract from a key tool in America's national security playbook: the ability to deploy crippling sanctions against rogue states and those that violate human rights.
Let us not forget that the structuring of a fair international monetary system is the indispensable prerequisite for the normalization of global political and economic balances. Since the topic, even if of fundamental importance, constitutes a purely technical aspect of economic policy, it must first be clarified that it presupposes, upstream, a discourse that must necessarily touch on essential aspects of rationality, ethics and culture, because otherwise the monetary instrument "goes mad" in the hands of those who use it and is no longer an instrument at the service of the community, but vice versa a serious threat to the very fundamental freedoms of peoples, above all when it is in the hands of a regime, such as the Chinese one, which has reached the level of totalitarianism. When astonishing terms enter everyday language, public opinion loses awareness of their meaning and adapts to accepting even absolutely extraordinary episodes as normal facts.
Source: Nicola e Gabriele Iuvinale, “La Cina di Xi Jinping. Verso un nuovo ordine mondiale sinocentrico?”, Antonio Stango Editore, 2023.