“One day everyone in the world will use DCEP,” Chandler Guo, a Bitcoin miner in China, told the BBC.
Digital Currency Electronic Payment, or “DCEP”, is China’s digital currency, which is now being tested in test programs in Suzhou, Shenzhen, Chengdu, Xiongan and the venues of the 2022 Winter Olympics. China will almost certainly be the first country to introduce a digital currency.
For decades, Beijing has dreamed of replacing the US dollar as the world’s reserve currency. Unfortunately for the Chinese communists, the digital yuan will not help them much. Moreover, it could even set China back on crucial points.
Why is Guo so optimistic? He believes that the overseas Chinese – 39 million of them according to his count – will use it. “They can make the DCEP an international currency,” says Guo.
Victor Shih, the oft-quoted researcher at the University of California, San Diego, points out that the digital yuan could be woven into applications such as TikTok, the extremely popular video sharing platform, or into video games.
However, this use will not be enough to prevent the internationalization of the currency, one of Beijing’s least successful initiatives. International use of the renminbi, as the currency is formally called, has declined in recent years.
In SWIFT, the world’s dominant money transfer system, less than 2 percent of transactions are now denominated in Chinese currency, compared to almost 40 percent in dollars. About 2 percent of the world’s currency reserves are held in renminbi, while almost two thirds are held in greenbacks.
It is no secret why people avoid the “redback”. “What investors are looking for in a reserve currency is not technology – it’s a currency that is stable, supported by a strong economy, freely convertible and widely usable,” Yahoo!
What China lacks above all is free convertibility.
The Chinese leadership has failed to make its currency freely convertible by the turn of the century, a promise it made before the 1997 Asian financial crisis, because this event had a bad reputation – both in China and in neighboring countries – for the outgoing “hot money” flows. The contagion generally discredited those who advocated an open financial architecture.
Then, in January 2011, Yi Gang, then head of the State Foreign Exchange Administration, a department of the Central Bank of China, promised to make the renminbi convertible on the capital account in five years.
By late 2015, it was generally expected that the Communist Party’s Fifth Plenary would announce the abolition of all capital controls by this year, the end of the country’s 13th Five-Year Plan. The party did not make this promise then, and China is no closer to free convertibility today.
Even those who hoped for a slight liberalization were disappointed. There have been decades of small changes, but progress has often been formally reversed or simply not implemented. In 2015, for example, Beijing stopped money transfers abroad permitted under Chinese law, a bureaucratic move to curb capital flight of nearly $2 trillion a year.
As former Chinese central bank governor Zhou Xiaochuan, known as “Mr. Renminbi”, said this month at a financial forum in Beijing, his country cannot have an internationalized currency if it is not freely convertible.
And China cannot allow free convertibility at this time – or at any other time for that matter. Officials in Beijing must continue to tightly control the flow of money across the country’s borders because their investment-driven economy depends on cheap cash for state-owned enterprises and state-owned banks – which means that interest rates on deposits will be depressed. If depositors had the choice, they would undoubtedly seek higher returns outside China.
The country’s financial and banking system, as well as the economy, could not withstand the resulting onslaught of cash outflows.
Moreover, Xi Jinping, the Chinese ruler, believes in the Communist Party’s strict “absolute” control over every aspect of society, as he calls it. The idea of free convertibility is therefore anathema to him.
So as long as China does not completely abandon its model of economic development and depose Xi as ruler, the renminbi – either in hard or digital form – will not dethrone the dollar.
But the digital yuan could further delay financial liberalization, for two main reasons. First, Beijing intends to use the DCEP “to combat crypto-currencies and global stablecoins,” as Ma Changchun, head of the Chinese central bank’s digital currency research institute, said at the federal government summit in Shanghai on October 25. Ma praised the “centralized management” of the digital yuan.
“The ultimate goal of a crypto currency is the separation of money and government,” Hong Kong-based crypto currency expert Stewart Mackenzie told the BBC. China is trying to further unify money and state, so that the state will be able to monitor every transaction in the country immediately. This monitoring will further strengthen the Communist Party’s control over society and thus hinder financial liberalization.
The DCEP will also undermine what the BBC rightly calls the “most advanced” digital payment system in the world. Last year, about four-fifths of payments in China were made through either Tencent’s WeChat Pay or Alibabas Alipay. About 94 percent of electronic payments in China go through these two digital wallets. As the New York Times advised this month: “Don’t even try to pay cash in China”.
The Ma of the Central Bank claims that the digital yuan will not affect WeChat Pay and Alipay. “WeChat Pay and Alipay are just wallets, while the DCEP is the money in them,” Ma said at the federal summit. “They are not competitors.”
This is only technically true because the DCEP will be distributed through an app that some people will – no doubt – use instead of the two popular wallets. So it looks like the state wants to compete again with China’s successful private companies.
The true story of the digitalization of the yuan is not what it will contribute to further currency internationalization, but what it says about a greedy party state that demands complete internal control. The price of state control is, among other things, the reversal of private-sector-driven progress.
Gordon G. Chang is the author of the book The Coming Collapse of China. Follow him on Twitter: @GordonGChang.
The views expressed in this article are those of the author….