China has started testing its self-developed digital yuan, becoming the first country to implement a digital currency in its real financial system.

According to a report by China Daily, the pilot program for the digital yuan has begun trials in four cities: Shenzhen, Suzhou, Chengdu, and the Xiong'an New Area, which will host the 2022 Winter Olympics in Beijing. The digital yuan is being integrated into the official financial systems of these cities.

The analysis report on the future of China's economic engagement by China Daily also indicates that the development of the digital yuan is one of three impacts on trade and investment, alongside the weaponization of the dollar and the U.S. withdrawal from trade and engagement with China.

The digital yuan is China's initiative aimed at countering the weaponization of the dollar and providing investors and businesses with alternatives, as well as advancing the next step in the payment system that uses the yuan as a payment option instead of the dollar. A key action is the rapid development and deployment of the digital currency within China, followed by regional acceptance.

The digital yuan is officially used in the financial systems of all four cities, with part of the salaries and wages of government agencies in these cities being paid in digital currency starting in April.

The digital currency, issued by the People's Bank of China, serves as an alternative to the traditional dollar payment system and mitigates the impact of sanctions or threats of exclusion at both national and corporate levels. It may also facilitate integration into the global currency market, reducing risks from political stagnation.

The stability of the yuan during the COVID-19 pandemic has reinforced its popularity among investors. Both the dollar and digital yuan payment systems may be used in tandem, and if necessary, separately.

The digital yuan used in Suzhou will focus on transportation, while Xiong'an will use it for food and retail goods.

Screenshots of the application interface for merchants supporting the digital yuan have been released since mid-April.

Digital platforms are widely used in China, including Alipay under Alibaba's Ant Financial and WeChat Pay from Tencent, but they do not replace the current currency.

Su Yuan, a professor at the National Research Institute of Peking University, commented through CCTV that cash, which is an offline system, and the scattered transaction data from current platforms prevent the central bank from tracking information in real-time.

“For the digital yuan, while there may not be significant changes for users or in central bank oversight, the implications for finance, payment, business, and social governance are substantial,” he said.

On April 17, the Digital Currency Research Institute of the People's Bank of China, responsible for developing the system, announced that research and development of the digital yuan has made significant progress, with most of the system's structure and defect corrections completed.

The digital yuan, which will be pegged to the yuan, has been in development for 2-3 years. In August of last year, the People's Bank of China announced it was nearing completion, but in the following month, Governor Yi Gang stated there was no set date for its launch.

The digital yuan, also known as e-RMB, will be issued solely by the central bank, initially offered to commercial banks and other service providers. An official revealed to China Daily that citizens can convert funds in their bank accounts to digital currency and deposit money through electronic wallets. With advanced technology, the digital yuan can be exchanged without internet access and can be used for contactless payment systems.

This pilot program for the digital yuan includes several participating companies, including McDonald's and the famous sandwich chain Subway.

The People's Bank of China has been developing the digital currency for the past 2-3 years. Although details are limited, this digital currency differs from typical cryptocurrencies like Bitcoin, which do not disclose holder information and are not controlled by any single entity, but rather operate on a decentralized basis and are not issued by a central authority.

The digital yuan will be issued by the central bank, aiming to make digital payments more convenient and faster.

The Future of China's Economic Engagement

The analysis report on the future of China's economic engagement by China Daily begins by discussing the overall economy to pave the way for assessing the impacts of trade and investment. It highlights the recent drop in global crude oil prices, which went negative, the unemployment rate in the U.S. being nine times higher than during the 2008 financial crisis, the management of the COVID-19 outbreak, and a healthcare system that favors the wealthy, while around 2,000 people die every day. Meanwhile, the stock market has risen for five consecutive weeks, indicating a disconnect between economic reality and financial markets, prompting Americans to awaken to economic realities.

The report states that this warning signal will impact all markets, investment flows, and supply chains in a manner similar to the financial crisis. The economic contraction is not due to loans as in the financial crisis, but rather lockdowns that have stalled economic activities and necessitated economic restructuring, affecting businesses reliant on credit due to cash flow shortages, meaning they cannot service debts. Many companies may not recover after temporarily closing.

Under the U.S. economic system, the poor and middle class have returned to prosperity with increasing debt, thus the likelihood of a severe market contraction is high. The impact of the U.S. on China's recovery path will be swift and significant, as market pressures to decline are concepts that both the U.S. and its allies want to sever ties with China. More dangerously, there is a narrative suggesting punitive measures against China, led by Missouri, incited by President Donald Trump, as evidenced by headlines stating that Missouri is suing China.

However, this is merely a hollow threat, as it is not possible to sue a state or country. If it were feasible, the U.S. would have been sued by many countries during the financial crisis due to lax financial market regulation and risky financial engineering that created hazardous financial products.

Nonetheless, this demonstrates that there is a push from the U.S. to isolate, sever ties, and punish China, which seems to have severe repercussions not only for China but also for the U.S. economy. Additionally, it affects the foundational trade and investment flows, weakening some industries and diminishing efficiency, beyond trade barriers and tariff measures, and has subsequent effects for countries still wishing to do business with China.

All of this impacts trade and investment in three ways.

The first impact on trade and investment is the weaponization of the dollar to leverage the strong arm of U.S. foreign policy, which has been effective through unilateral sanctions threatening to exclude companies from the dollar payment system, SWIFT, a global interbank financial network. President Trump has shown a willingness to use access to the dollar settlement system as a weapon for foreign policy.

This approach began with European companies trading with Iran, which complied with United Nations guidelines but were threatened with exclusion from the dollar settlement system in 2019 when the U.S. imposed sanctions. Exclusion from the dollar settlement system applies to all types of trade, not just trade with Iran.

Similar sanctions have also been applied to Venezuela to achieve U.S. foreign policy goals, and recently, the government in Western Australia was pressured to cancel a service agreement with a new rail network with Huawei due to unsuccessful money transfers.

While it is unlikely to see nationwide sanctions against China similar to those imposed on Iran, specific companies may become targets, as European companies and Huawei are already under pressure.

The second impact is the counteraction against the weaponization of the dollar through the development of China's digital yuan.

The third impact is that if the U.S. withdraws from trade and engagement with China, it will strengthen the Belt and Road Initiative (BRI) to lead in free trade and trade without aggressive behavior from major countries that disregard the interests of others. The BRI is progressing well and has the momentum to form an alternative to the trade and exchange rate structures of the Western market that impose trade barriers.

Countries driven by lifting their populations out of poverty and leading to new consumer groups will be growing markets. Many countries have joined the BRI and may be open to reducing dependence on the dollar.

China appears to be providing assistance to combat the COVID-19 outbreak to countries participating in the BRI, having also supplied medical equipment to the U.S. and other nations, which is a form of soft power and aligns with a strategy focused on protection rather than expansion through trade relations.

Although Western media has not reported on the BRI recently, it remains a foundational alternative for the economic structure post-COVID-19. The role of organizations like the Silk Road Chambers of International Commerce and others is becoming increasingly important in maintaining and enhancing business engagement in an environment without unilateral power or exclusion.

The loss of market or market share in the U.S. due to U.S. policies aimed at isolating and severing connections, which is a form of punishment, does not mean that China's economic progress will stall, even though it may be painful.

Replacement from markets under the BRI framework and the growth of these markets, combined with the absence of threats from the weaponization of the dollar in trade activities and settlement systems, has created a new structure for China's global economic engagement.

The Yuan's Increasing Role in the Global Payment System

The share of the yuan in international payments and capital account settlements hit a record high in March as cross-border investment replaced trade, driven by momentum for the yuan to become China's main currency, according to experts.

The State Administration of Foreign Exchange of China stated that the use of the yuan in international payments accounted for 38% of all currencies by the end of March, the highest on record since data collection began.

This also reflects a significant improvement in the yuan's status in the international payment and settlement system since 2015 when the yuan was included in the International Monetary Fund's (IMF) Special Drawing Rights (SDRs). Increased financial openness has also contributed to the rise in international yuan usage.

Data from SWIFT, the global interbank financial network, shows that the yuan remains the fifth most popular currency for international payments by value, accounting for 1.85% by the end of March, up from 1.65% in January and a 21.48% increase from the previous month.

Guan Tao, head of international economics at BOC International (China) Ltd., revealed that although the COVID-19 outbreak has reduced global financial investment, China's foreign exchange and capital markets have remained resilient. In the first quarter, the trade and services surplus decreased, net capital outflows significantly reduced, and turned into net inflows compared to a net outflow of $20.1 billion during the same period last year.

The stable yuan in the first quarter of this year saw foreign investment in Chinese bonds increase by 48%, amounting to $16.7 billion, while net outflows from the stock market were 179.9 billion yuan or $25.43 billion, compared to net inflows of 193.5 billion yuan during the same period last year.

Tu Yonghong, deputy director of the International Finance Institute at Renmin University of China in Beijing, commented that as foreign financial markets tighten due to the COVID-19 outbreak, China can provide yuan liquidity to the global market by expanding overseas investments, increasing cross-border lending, boosting imports, and increasing offshore yuan deposits.

“The COVID-19 outbreak may enhance the yuan's role in cross-border investment and contribute to its status as a major global currency. Yuan liquidity will help fill the gap while the dollar is in short supply,” he said.

“Greater financial openness, especially in the yuan bond market, will promote the yuan's status as a major global currency,” he added.

SOURCE: www.thaipublica.org