Is the Digital Renminbi More Than Just Money?

Despite China’s efforts to boost the international standing of the renminbi, the currency still significantly underperforms globally in comparison to its shares in global trade and output. Recent data show that while the international share of the renminbi has experienced some growth in recent years, it remains modest in every function pertaining to an international currency (see Table 1). To internationalise the renminbi is a logical ambition for the Chinese government, driven not only by economic considerations but also by underlying geostrategic interests. With the world economy becoming more multipolar, China is deeply concerned about its vulnerability to potential financial sanctions, which would be exacerbated by its dependence on the US dollar and the Western-centric payment infrastructure for global transactions.

Table 1. The international status of the renminbi

Sources. Share of global GDP: World Bank Data; COFER: IMF Data; BIS: 2019; SWIFT: RMB Tracker, https://www.swift.com/node/11096.

The appeal of an international currency is influenced by various economic and institutional factors such as overall macroeconomic conditions, the openness and transparency of issuing financial markets and the credibility of social institutions in the issuing country.
China’s economic structure, which is characterised by a persistent current account surplus and a partially closed capital account, along with government influence on the economy, undermines the potential international status of the renminbi. While the introduction of the digital renminbi (e-CNY) is not expected to mitigate the current economic fundamental constraints, in the Chinese narrative its development is a potential tool to further support the internationalisation of the renminbi.

In theory, if – and this is a big if – there is widespread adoption of national central bank digital currencies (CBDCs) around the globe, CBDC arrangements among national systems could foster a new underlying infrastructure for transnational transactions which could allow central banks to mitigate many of the frictions in the current global system by starting from a ‘clean slate.’

However, both in China and globally, progress toward developing and implementing national CBDCs is currently at an early stage. Most countries are still in the experimental or consultative phases, and widespread adoption is yet to be realised, with key design and policy choices needing to be first resolved at the domestic level. Moreover, multi-CBDC arrangements would require interoperability, which implies high – and extremely complicated – coordination to set common legal, regulatory, technical and operational standards.

Nonetheless, current experiments involving cross-border use cases of CBDCs show that common national CBDC systems  are “operationally feasible and can bring efficiencies.” Moreover, recent research stresses that the role of a currency as an invoicing or payment unit acts as a complement to its role as a store of value, resulting in positive feedback loops.

Beijing’s substantial political commitment to boost multilateral trials with other national CBDCs mirrors its ambition to assume a global leadership role in this domain. In a future scenario, China is betting that CBDCs could be the underlying foundation on which new innovative financial services will be built. Not only payments, clearing and settlement, CBDCs could potentially ease the tokenisation of securities and deposits.

While the e-CNY will not mitigate the existing constraints associated with the global use of the renminbi as a transactional instrument, it is not simply a means of transacting. It is also an underlying technological infrastructure. Through multilateral cross-border experiments with CBDCs and by lobbying in international fora, China is aiming to shape and export a potential model which incorporates technical and regulatory standards originating in its system. In the global arena of digital competition, nations are vying for first-mover advantages to establish standards and promote their particular models of development. Despite no unanimous agreement among experts, pursuit of a first-mover advantage could also be applicable in the context of launching a CBDC.

Despite the e-CNY being far from a potential threat, if China becomes a provider of technology and an international leader in standards in the CBDCs domain, it could potentially facilitate the development of regionalised or trade-link-based alternative payment networks in the long run. While this scenario should not be overstated – and it is far from being established – the current risk of geoeconomic fragmentation and politicisation of the global supply chain might become a silver bullet for China’s ambition.

[1] Note: since each transaction involves two currencies, the sum of individual currency shares will also equate to 200 per cent.

This blogpost has been produced in the framework of the EU Supervisory Digital Finance Academy (EU-SDFA).

The EU Supervisory Digital Finance Academy (EU-SDFA) is a TSI flagship initiative aimed at supporting financial supervisory authorities in coping with the risks and opportunities associated to the use of advanced technologies in the financial sector. The European Commission – DG Reform has established the Academy in cooperation with the three European Supervisory Authorities (EBA – ESMA – EIOPA) and the Florence School of Banking and Finance part of the Robert Schuman Centre of the European University Institute (FBF-EUI).