The writer is a founding partner of Gavekal Dragonomics, a China-focused economic research firm
At the Beijing Winter Olympics, the Chinese government unveiled two initiatives. One was Presidents Xi Jinping and Vladimir Putin’s declaration that China and Russia have “boundless” friendship. The other was a trial of the digital yuan, or e-CNY, which was offered to domestic and overseas athletes and spectators.
After Russia’s invasion of Ukraine and the imposition of harsh financial sanctions by the United States and its allies, it is reasonable to wonder whether China’s digital currency is paving the way for a new dollarless global monetary system. that would allow countries to evade US sanctions. .
In the short term, the answer is clearly no. For one thing, while China has complained about the sanctions, it has largely complied with them. Its companies and banks avoid doing business with sanctioned Russian companies, for good reason.
China’s economic relationship with the United States and its allies in Asia is far larger and deeper than that with Russia. In 2021, nearly half of China’s $3.3 billion in exports went to the US, EU, UK and US treaty allies in Asia; only 2% went to Russia. Chinese tech industries are still heavily dependent on equipment and know-how provided by the United States and its friends.
On the other hand, e-CNY is not even ready for large-scale international use and occupies a negligible place even in domestic payments. Chinese policy makers have been disengage from the outset that their primary goals for the digital yuan are domestic: improving payment efficiency, serving the unbanked, and fighting corruption.
From its first trial launch in April 2020 until the end of 2021, total e-CNY transactions in China amounted to Rmb 87.5 billion ($13.5 billion). This was just 0.002% of the $715 billion in online payments in China over the same period.
Finally, efforts to internationalize the conventional and non-digital renminbi over the past decade have stalled. The renminbi represents 2.5% world reserves. Russia, which has tried to protect its economy from sanctions by transferring its reserves to dollars, holds only 13% of those reserves in renminbi – less than the euro, gold or even the hated dollar.
The payout table is similar. The share of Chinese trade settled in renminbi has hovered around 10-15% since 2016, and the Chinese unit accounts for less than 3% of foreign exchange transactions processed by the Swift messaging system.
The renminbi’s internationalization failures reflect structural problems. The main obstacle is China’s tight capital controls, which it needs to maintain its monetary independence and ensure the stability of its heavily indebted domestic financial system.
These controls, combined with the immaturity of China’s bond and currency markets, mean that international investors have little incentive or ability to hold large renminbi balances. They rightly fear that these holdings could be easily liquidated at any time and for any amount. Until they have this confidence, the use of the renminbi for cross-border payments will remain limited.
Another factor is the network effect — the tendency for people to use a service because everyone else is using it. The infrastructure and institutional arrangements for paying in dollars will be difficult to change. It is not easy to see how e-CNY, on its own, could overcome these constraints. One way to do this is to create a much more efficient channel for international payments. But this will require a lot of technical effort, which has only just begun.
Some argue that by starting early, China has a “first mover advantage” in creating the digital currency standards of the future. More likely, network effects will overwhelm this advantage. China has started payments experiments with Hong Kong, Thailand and the United Arab Emirates.
But seven major central banks, including the Federal Reserve and the European Central Bank, have joined with the Bank for International Settlements to establish digital currency standards. Any effort by this group to build a digital payments network is sure to be more effective than a group of smaller central banks running a system built around China’s partially convertible currency.
In response to the expert advice as the United States and its allies accelerate the pace of digital currencies, US President Joe Biden has issued an executive ordered commission a study of a digital dollar. It is appropriate. But the goal should be to carefully build a modern payment system that combines efficiency and privacy, not to ward off an illusory threat from China to dollar dominance.