China digital currency: China, Hong Kong begin testing digital yuan as Beijing ramps up research into cross-border use

The People’s Bank of China and the Hong Kong Monetary Authority have begun ‘technical testing’ for cross-border use of the digital yuan
International collaboration has also accelerated between China’s central bank and its counterparts in Thailand and the United Arab Emirates

China digital currency

Frank Tangin Beijing

Published: 5:30pm, 2 Apr 2021

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China will expand cross-border use of its sovereign digital yuan “when the time is ripe”, with technical testing already under way with Hong Kong, the country’s central bank has said.

China is a world leader in the development of a central bank digital currency (CBDC), with 200 million yuan (US$30.4 million) already distributed in pilot projects across the country, including in cities like Shenzhen, Suzhou and Beijing.

Although China’s sovereign digital currency, the so-called Digital Currency Electronic Payment (DCEP), is designed largely for small retail purposes, cross-border application is feasible, Wang Xin, head of the People’s Bank of China (PBOC) research bureau, said on Thursday.

“When conditions are ripe and market demand calls, cross-border transactions in digital yuan can be settled,” he told a media briefing in Beijing.

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The PBOC’s digital currency research institute and the Hong Kong Monetary Authority have begun testing it for cross-border use, Wang said.

Hong Kong is a major offshore yuan centre and jumping off point from which China can advance its ambitions to internationalise the yuan.

International collaboration has also accelerated between China’s central bank and its counterparts in Thailand and the United Arab Emirates. The nations are studying the use of digital currencies and blockchain technology in cross-border payments.

Beijing’s rapid testing of the digital yuan comes amid persistent worries about US dollar hegemony and Washington’s ability to turn it against China.

The PBOC announced late last month a new venture with Belgium-based SWIFT financial messaging service and four Chinese institutions that will provide localised financial services to make cross-border transactions more stable and secure.

The initiative was interpreted by some analysts as a “defensive move” amid ongoing tensions with the United States. But others saw it as part of Beijing’s efforts to promote yuan internalisation and the development of the nation’s digital currency

Data from the International Monetary Fund showed the US dollar accounted for 59 per cent of global foreign exchange reserves at the end of last year, a 25-year low, but still far ahead of other currencies. The yuan’s share rose to 2.3 per cent from 2.1 per cent a quarter earlier.

China’s development of its digital currency has forced other central banks to follow suit.

Christine Lagarde, president of the European Central Bank, told Bloomberg last week that launch of a digital euro was possible within four years.

The Federal Reserve Bank of Boston in the US and Massachusetts Institute of Technology are also exploring a digital dollar platform.

Agustin Carstens, general manager of the Bank for International Settlements, called for more international cooperation.

“CBDC design is a global effort of collaboration rather than competition … At the BIS Innovation Hub, such work is being put into practice in joint, collaborative projects,” he said at an event on Wednesday.

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Wang said the PBOC will “steadily promote” the results of its research and testing on China’s sovereign digital currency.

However, a clear timetable for launch is still not on the radar.

“Overall, the feedback of participating institutions and regions are positive,” he said.

“As [the launch of] the digital yuan approaches, we must further enrich relevant application scenarios and accumulate more experience.”