China’s yuan internationalisation goal ‘is not to replace US dollar’, top banking official insists

China’s efforts to promote its digital currency, as well as the internationalisation of the yuan, had caused concerns it wanted to topple the US dollar as the world’s main reserve currency
New People’s Bank of China (PBOC) deputy governor Li Bo also confirmed that there remains no timeline for a nationwide rollout of the digital yuan

Currency war

Orange Wang

Published: 1:30pm, 19 Apr, 2021

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China has played down US concerns about its ambitions for the yuan, with the new deputy governor of the People’s Bank of China (PBOC) insisting “our goal is not to replace the US dollar or any other international currency”.

The gathering momentum of China’s digital currency efforts has caught the attention of various American officials, with the US Treasury, State Department, Pentagon and National Security Council reported to be bolstering their efforts to understand the potential implications of a digital yuan.

“For the internationalisation of [the yuan], we have said many times that it’s a natural process,” Li Bo, who was appointed as a new deputy governor of the PBOC earlier this month, told the Boao Forum for Asia in Hainan on Sunday.

“Our goal is not to replace the US dollar or any other international currency, our goal is to allow the market to choose and to facilitate international trade and investment.”

We know what we need to do, there are several things we need to do before we can roll out the digital currency nationally

Li Bo

Last week, a senior Bank of Japan official downplayed the potential for China’s digital yuan to threaten the US dollar’s position as the world’s main reserve currency.

Li also confirmed that as yet “moving forward, we don’t have a timeline [for rolling out the digital currency nationwide]”.

“But we know what we need to do, there are several things we need to do before we can roll out the digital currency nationally,” he added.

The PBOC will, according to Li, continue to experiment and increase the scope of its pilot projects, while also strengthening the digital currency ecosystem, including technology and infrastructure, in addition to continuing to improve its safety and reliability.

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“Finally, we need to build a proper legal and regulatory environment,” he added.

China has already distributed some 200 million yuan (US$30.7 million) in digital currency as part of pilot projects across the country, including in cities like Shenzhen, Suzhou and Beijing. The PBOC also confirmed earlier this month that it will expand cross-border use “when the time is ripe”, with technical testing already under way with Hong Kong.

Hong Kong is a major offshore yuan centre, while China’s international currency collaboration has also accelerated between its central bank and its counterparts in Thailand and the United Arab Emirates.

Referring to the interoperability of China’s digital currency, or the way it will connect and communicate with other systems, Li said that the PBOC was in no rush to reach a solution.

Using digital technology can greatly improve convenience, but it is not a way to dominate the world with a single currency

Zhou Xiaochuan

“Interoperability is a very complex issue … right now we are open to different options and experimenting with different technologies,” he said.

“Our focus, again, is that we want to establish a very solid domestic e-yuan first, and build up a healthy ecosystem, at the same time working with our international partners. Hopefully, in the long term, we’ll have a cross border solution as well.”

Former PBOC Zhou Xiaochuan, speaking at the same forum, said that the initial consideration for the development of the digital yuan was not for the internationalisation of the currency, but to instead create a more convenient payment system for the Chinese public.

“The rules of different countries are not the same, we must respect the monetary sovereignty of various countries’ central banks,” Zhou said. “Using digital technology can greatly improve convenience, but it is not a way to dominate the world with a single currency.”

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According to a report from consultancy PwC, China is third behind the Bahamas and Cambodia in a ranking of the maturity of central banks’ retail digital currency projects.

More than 60 central banks are now exploring digital currencies, with retail projects more active in emerging economies given the importance of financial inclusion, while interbank or wholesale applications tend to be more predominant in advanced economies, the report said.

The Bahamas and Cambodia take top marks in retail because their digital currencies have already been rolled out, while China is still in the test phase. Only 23 per cent of retail projects have reached the implementation stage, while nearly 70 per cent of wholesale projects are running pilot programmes, according to the report.

“[Central bank digital currencies] will contribute significantly to the modernisation of the international monetary landscape, hand in hand with reconfiguration in both payment and financial infrastructure,” PwC said. “They will generate numerous opportunities for further digitisation in both corporates and financial institutions, as their integration in payment and financial infrastructure progresses.”

The general public will be one of the biggest beneficiaries of [central bank digital currencies] as it will give them access for the first time to a digital form of central bank money. And that is a big milestone in the evolution of money

Henri Arslanian

Central bank efforts to develop digital currencies accelerated first after cryptocurrency bitcoin became more popular and then once the Facebook-backed Libra project, now renamed Diem, was announced. By design, bitcoin, like other cryptocurrencies, is managed by its owners and not by a central authority, which has raised concern about global central banks. Diem, like other stable coins, is backed by an existing major sovereign currency, in its case the US dollar.

With China in the testing phase of its digital yuan, other countries have accelerated their efforts. Jurisdictions like Sweden and Japan have started testing their own digital currencies, while the European Central Bank is actively considering doing so. The US Federal Reserve, though, has signaled it is in no rush to get a digital US dollar off the ground.

The report also said more than 88 per cent of central bank digital currency projects at pilot or production phase use blockchain as the underlying technology. While it is not always necessary for such projects, it helps offer secure transfer of ownership, transparent audit trails and increasing interoperability with other digital assets, the report said.

“The general public will be one of the biggest beneficiaries of [central bank digital currencies] as it will give them access for the first time to a digital form of central bank money,” said Henri Arslanian, global crypto leader at PwC. “And that is a big milestone in the evolution of money.”

Additional reporting by Bloomberg