China: E-Yuan as Beijing's Latest Tool

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As China’s importance to global trading and finance has grown exponentially over the past decade-and-a-half, so has its desire for the yuan to be recognized an international currency. Until recently, this remained an uphill task. But the tide could be turning. China has moved the goalpost from the internationalization of the yuan to its digitalization, a process in which China is much more advanced than other countries. This could give Beijing a first-mover advantage in setting standards and supplying technologies worldwide, not dissimilar to the way it was able to impose its solar panel technologies a decade ago, or how it could soon offer its 6G standards to the world. The prospect is alarming many at a time when China is increasingly assertive and keen to utilize tools of governance that both serve it better and put it beyond the reach of US sanctions. It is US dollar supremacy in international settlements that allows US sanctions on countries and individuals to be effective, by depriving them of access to international trade and markets. By contrast, the e-yuan is an instantaneous and unmediated payment tool that would not have to go through international financial settlement tools, such as the financial messaging service Swift. Were China’s trade partners, that is to say, almost any country in the world, to adopt it, the US would lose leverage on countries that do not play by its rules -- including China. The People's Bank of China (PBOC), China’s central bank, started working on a digital yuan in 2014. But the Donald Trump presidency may have accelerated China’s research, by giving the impression of a US increasingly inclined to play politics with the dollar -- from its sanctions drives against Iran, Venezuela and Russia to its trade standoff with China (EC Dec.6'19). PBOC has taken advantage of the e-payments technologies developed by private giants Tencent and Alibaba through their respective WeChat and Alipay apps, which have come to replace most cash transactions. But the bank is also keen to use its digital yuan to rein in the power of the giant private players, allowing the state to fill the digital space at the expense of private currencies, like the bitcoin of Facebook’s short-lived Diem currency. “WeChat and Alipay are wallets, while the digital yuan is the money in the wallet,” Mu Changchun, head of the PBOC's digital currency research institute, told a forum last year. Digital currencies, when sufficient numbers are established, would probably be exchanged through central banks via Swift or other similar means. But China could choose to use the e-yuan to bypass Swift. “In the case of China, it can be done by e-yuan if enough countries find it easy to do business with China as a medium of money transfer, beginning with Belt and Road partner countries -- something the US will find increasingly worrisome moving forward,” Gerald Chan, of the University of Auckland, New Zealand, told Energy Intelligence. The e-yuan could help the internationalization of the yuan in ways that neither past oil sales to China, nor the launch of the Shanghai crude oil futures settled in the yuan, have been able to. Russia and Iran have long been touted as countries whose large energy supplies to China could be paid in yuan, but oil trade in yuan has largely failed to take off. De-dollarization is more pronounced in trade between Russia and China, a report by the research arm of Dutch bank ING noted last November. But this has happened through a shift in oil contracts from US dollars to euros, rather than through increased use of the yuan.

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