For now, the central bank is keeping the details of its digital currency tightly under wraps, and the PBOC did not respond to faxed questions sent more than a week ago to its Beijing office.

The PBOC’s preparations come as Ant Group, an affiliate of this newspaper’s owner Alibaba Group Holding, plans to raise about US$30 billion in Hong Kong and Shanghai, in what could become the largest initial public offering in history.

Analysts and investors are busy assessing how Ant Group’s Alipay as well as its rival WeChat Pay, will coexist with the central bank’s digital yuan.

Many analysts are sanguine about the likely impact of the DC/EP on Alipay and WeChat Pay, even if the digital currency’s imminent debut looks like the run-up to an epic showdown.

The digital yuan and the existing systems are not mutually exclusive. Most consumers are likely to continue using their Alipay or WeChat Pay platforms – or both systems, in many cases – for their multitude of applications and services that have evolved from simple payments to loans, asset management and money-market investments.

The usage data of hundreds of millions of users are already giving Ant and Tencent valuable insights into consumer behaviour, which give the companies further advantage over rivals’ attempts to catch up, analysts said.

Analysts also point out that Beijing is working with financial institutions rather than supplanting them to maintain financial stability and reach its goals faster. The central bank’s top priorities are fine-tuning monetary policy, weeding out tax evaders as well as enhancing financial inclusion.

“We expect an immaterial impact of the digital currency on the core business of the internet companies in the near-term, as the design is still at an early stage with many uncertainties in technologies and regulation,” said Bank of America equity analyst Sachin Salgaonkar in a June 11 report.

The evolving structure of the DC/EP, comments by China’s central bank officials, patents filed by Alipay, as well as the payments giants’ participation in the central bank’s project, back up their analysis.

The DCEP puts China at the forefront of ­developing a retail central bank digital currency (CBDC) globally at scale. Policymakers and businesspeople around the world are keen to see how it will interact with private enterprise as they move forward with their own ­digital currencies.

“China is positioning itself as a trailblazer when it comes to the future of money,” said Henri Arslanian, who runs PwC’s cryptocurrency business globally and advises central banks on digital currencies.

For all of the PBOC’s recent flurry of activity, a launch date is still some way off. The central bank has been studying digital currencies since 2014. Its former governor Zhou Xiaochuan said in March 2018 that it might take another decade before the central bank launched one of its own, although that now seems a conservative estimate.

“Libra was the first catalyst, and Covid-19 has accelerated central bank activity,” said PwC’s Arslanian.

“Being one of the newest of its kind, we believe it will take years before an official launch of the DC/EP system in China,” said Mizuho Securities analyst Ben Huang in a June 1 report.

Launching a digital currency is complex, particularly for a large economy, and as former central banker Zhou noted in March 2018, if there is a technical fault, consumers could lose money.

“The PBOC has everything to lose if it rushes and everything to gain by doing it properly,” said Turrin.

The e-yuan will next be distributed to payment service providers and other private sector institutions, the central bank said in a July report published by the International Monetary Fund.

The retail leg of China's digital currency is ready as most Chinese are familiar with using e-wallets. The hard part is future-proofing the back-end of the system, the part that roots out money-laundering and which uses big data to fine-tune monetary policy, said analysts.

“Alipay and WeChat Pay are the first generation of digital payment in China, and the CBDC will be the second generation,” said Turrin. “Now they have to develop a new digital system; and it will not simply be a mirror of the existing fiat system, it has to be ready for a new generation of digital cash usage.”

The Chinese central bank established a fintech laboratory in July with little fanfare. Taking its name from the central bank’s street address in the Chinese capital, Chengfang Financial Technology is armed with 2 billion yuan in capital for software development and research into data processing.

The PBOC is also treading carefully as its CBDC could cause the bank run of all bank runs, if not set up correctly. Logically, people would drain their accounts to put money in a risk-free e-wallet backed by the government, especially in an era of relatively low-interest rates.

A CBDC could also wreak havoc on banks’ profitability. Banks make money out of holding money, so if citizens prefer to hold money in an e-wallet instead of a bank account that means less money for the banks to lend.

To avoid such upsets, the PBOC told the IMF that it is likely to limit e-yuan to small, retail transactions by setting maximum daily and yearly limits on payments and that it will only process large amounts by appointment. The PBOC said it may apply fees for large-sum or high-frequency transactions. It will also offer no interest on accounts.

“It is not the purpose of the PBOC to compete with commercial banks or third-party payment companies for users’ assets and business opportunities,” said Mizuho’s Huang.

Ant and Tencent are also helping the government on the project, a sign that they do not think that the CBDC will kill off their own apps. Ant confirmed its participation in the project within its IPO prospectus, while a Tencent spokeswoman declined to comment.

“We expect the leading payment companies like Tencent and Ant to be part of the research and design process led by the authorities, contributing technical and operating experience and know-how,” said Salgaonkar.

The Bank of International Settlements said CBDCs can coexist within a two-tiered payment system, allowing central banks to focus on ensuring trust, stability and integrity in payments while the private sector is best placed to undertake the consumer-facing activity of CBDCs.

Still, Mu sees the CBDC and the payment systems as ultimately complementary. “In the future, I can only see synergy, not competition with them,” he said.

The central bank’s digital yuan will have an advantage over other e-wallets in its legal status as the fiat currency system, which is handy in remittances. Also, Alipay and WeChat Pay are not interoperable, requiring an intermediary bank to facilitate transfers between the two systems. The central bank’s digital yuan would be free of such constraint, and will be compatible with both.

In terms of anonymity, the systems are fairly equal, said analysts. “A large majority of Chinese online consumers are likely to be indifferent to using RMB or a new digital currency for online payment, as anonymity is not provided to them in the current online payment scenarios,” said Bank of America’s Salgaonkar.

“People don’t turn to bank apps for entertainment on a Saturday night, but they do turn to Alipay and WeChat,” said Turrin.

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Is China a currency manipulator?

Is China a currency manipulator?