China’s digital currency no threat to global monetary systems, former central bank chief says

Beijing is not seeking to replace existing currencies with its digital yuan, former People’s Bank of China governor Zhou Xiaochuan tells Shanghai forum
But its ability to process payments and handle foreign exchange transactions simultaneously and in real time could transform cross-border trade, he says

China digital currency

Karen Yeung

Published: 12:00am, 14 Dec 2020

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China’s new sovereign digital currency could be a boon for cross-border trade while also supporting Beijing’s efforts to promote the yuan as an international currency, the former head of the country’s central bank said on Sunday.

Speaking at the Shanghai Financial Forum, Zhou Xiaochuan, who stepped down as governor of the People’s Bank of China in 2018, said that one of the major benefits of using a digital system is that it allowed both payments and currency conversions to happen in real time.

“If the currency exchange is realised at the moment of a retail transaction, and there is oversight of that exchange … it brings new possibilities for interconnection,” he said.

What is China’s sovereign digital currency?

A leading advocate for China’s sovereign digital currency plan, Zhou said it was important to note that the Digital Currency Electronic Payment – as it is formally known – was not intended as a replacement for globally accepted fiat currencies like the US dollar and the euro.

“If you are willing to use it, the yuan can be used for trade and investment,” he said. “But we are not like Libra and we don’t have an ambition to replace existing currencies.”

He was referring to the blockchain-based payment system and cryptocurrency proposed and backed by social media company Facebook. Announced last year, and originally known as Libra, it changed its name to Diem at the beginning of this month.

We can’t push them on sensitive issues and we can’t impose our will. We must avoid the perception of great power chauvinism

Zhou Xiaochuan

Rather than challenging foreign exchange regulatory frameworks and monetary systems, Beijing wanted to persuade consumers and overseas merchants to gradually accept digital yuan payments, Zhou said.

China had learned a lesson from the reaction to the Libra/Diem system – policymakers around the world feared it would disrupt financial systems and erode monetary sovereignty – and was therefore taking a more cautious approach, he said.

“Some countries are worried about the internationalisation of yuan,” he said. “We can’t push them on sensitive issues and we can’t impose our will. We must avoid the perception of great power chauvinism.”

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This was the first time Zhou had spoken so openly about China’s ambitions for its sovereign digital currency, and he seemed confident in its ability to carve a position alongside established payment systems.

Most retail cross-border payments involving Chinese consumers or vendors are already cashless – settled via credit cards or payment services like Alipay and WeChat Pay – but a digital yuan offered additional benefits, Zhou said.

While foreign credit cards and China UnionPay debit cards could manage foreign exchange transactions, they were “often not real time or transparent”, he said.

But with a digital yuan, “the problem of cross-border remittances is easily resolved”.