Why China’s digital currency won’t threaten US dollar dominance

A few years ago, China’s currency seemed to be rising inexorably to global dominance. The renminbi had become the fifth-most-important currency for international payments and, in 2016, the International Monetary Fund included it in the basket of major currencies that determines the value of special drawing rights, the IMF’s global reserve asset.

Earlier this year, China rolled out a central-bank digital currency, making it one of the first major economies to do so. Trials of the so-called Digital Currency/Electronic Payment (DCEP) have started in four cities, and the government recently announced plans to expand the tests to major metropolises such as Beijing and Tianjin, as well as Hong Kong and Macau. But the DCEP on its own will not be a game changer that elevates the renminbi’s role in international finance.

True, China has leapfrogged the United States and other advanced economies in the technological sophistication of its retail payment systems. It seems plausible, therefore, that the digital renminbi will give China an edge in the competition for global financial-market dominance.

But the reality is more sobering. The DCEP will initially be usable only for payments within China, although this could change over time. For all the hype about the new digital currency, China’s Cross-Border Interbank Payment System, introduced in 2015, is a more important innovation that makes it easier to use the renminbi for international transactions.

This payment system is also able to bypass the Western-dominated SWIFT system for international payments and thus circumvent US financial sanctions, a tempting prospect for many governments. Russia – or, for that matter, Iran and Venezuela – will now find it easier to be paid in renminbi for their oil exports to China.