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Will The Dollar Be Endangered By The Chinese Digital Yuan

China is making huge steps towards the launch of their digital currency. The People’s Bank of China (PBOC) is the first major bank that is currently putting its digital currency and the Digital Currency/Electronic Payment (DCEP) to trials. The PBOC is sure that this will help to improve the efficiency of payments, enhance its real-time financial transactions monitoring, By using this new payment system, it is believed that tax evasion, money laundering, theft and fraud can be fought,—in addition to financial inclusion promotion. However, while some people have entertained the thought of the possibility that the Renminbi (RMB or yuan) as a substitute for international payments will be strengthened by DCEP, there’s a lot of time needed before the RMB becomes a serious challenge to the US dollar. The DCEP will certainly help in elevating Renminbi’s international position, but since China’s financial markets are weaker, this fact will keep the US dollar safe from getting dethroned from the Chinese currency.

With the features it possesses, DCEPs can help in reducing the costs of cross-border payments that use the RMB and improve their efficiency, as these payments are largely processed through China’s Cross-border Interbank Payments System (CIPS). CIPS is a system that came to fruition in 2015 to ease onshore clearing of international transactions using RMB, being able to process 137 billion yuan ($19.4 billion) a day. Many countries have increasingly settled their trade and investment transactions with China using the RMB. These countries are participating in China’s Belt and Road Initiative (BRI) and are financially sanctioned by the US—such as Russia, Iran, and Venezuela. For China, DCEPs use means that the international RMB trades will happen in a controlled way, as the PBOC determines who is able to take part in the DCEP network.

When it comes to RMBs use outside of these countries, however, it is important to study how the broader international community values the relative positives of cross-border payments that use RMB, in comparison with the usage of the US dollar and other major currencies through SWIFT, which is made of 11,000 financial institutions that operate in 200 countries. The efficiency and the transaction costs can be improved and reduced, respectively, by the digital yuan, but this is not the only thing that is being taken into consideration. Many countries have expressed concerns regarding safety and privacy and questions like ‘should we trust the Chinese authorities, who are able to monitor every single transaction that uses DCEP?’ quickly arose, also when considering the lack of conversion options of RMB, and the relatively underdeveloped regulatory framework and financial markets in China.

When talking about the last point, China has made it easier for foreign investors to invest in its domestic bond and stock markets by implementing different measures, mainly through programs like the Bond and Stock Connect, which allow internationals to buy/sell domestic securities without creating domestic brokerage accounts visit yuanpaygroup.org . The FTSE Russell global bond index is set to include Chinese RMB bonds, having been parts of the JP Morgan and Bloomberg indexes. Because of this, at the end of October, China’s international holdings of domestic RMB bonds reached about 3 trillion yuan ($455 billion), from the end of 2019 when it reached 2.18 trillion yuan ($327 billion).