Some believe that the digital renminbi is the best way to challenge the hegemony of the US dollar because it is built on greenfield payment rails with new technology and standards. The development of the digital renminbi could also leverage China’s increasing financial influence to replace the dollar with Chinese technology.
Concerns over the digital renminbi challenging the hegemonic position of the dollar are overblown. The digital currency is mainly designed for domestic retail transactions and is still in its trial phase. The PBOC has tested the cross-border use of the digital renminbi, but only limited to the Beijing 2022 Winter Olympics.
There is currently no direct link between the digital renminbi and renminbi internationalisation, but it does have the potential to facilitate cross-border payments.
The PBOC’s moves to develop the digital renminbi are a response to digital transformation and the rapid growth of private digital platforms. The PBOC intends to increase market competition by providing its own digital currency, which will improve the efficiency and safety of the payments system, facilitate faster payments and reduce transaction costs. In principle, the digital renminbi is an open, inclusive and innovative currency service system. At the end of June 2021, the PBOC had launched digital renminbi pilots in major cities, testing more than 1.32 million scenarios such as transportation, shopping, catering and utility services. Domestic consumers also enjoyed Lunar New Year ‘red packets’ of digital renminbi in February 2022.
The major barrier to the internationalisation of the renminbi is its limited convertibility and financial openness. In the past decades, China has made efforts to liberalise its capital account, implemented a new strategy of openness and encouraged two-way cross-border financial flows despite uncertainties about US decoupling. But compared with advanced economies, China is still not as financially open. Access to the renminbi is impeded by the fact that there is only full convertibility in a number of special trade or economic zones in China. Though digital payments can make financial transactions faster, they cannot make capital flows freer.
A digital renminbi can certainly facilitate foreign exchange payments. For example, it makes direct exchange easier and cheaper since China and its trading partners can use their own currencies rather than a third-party currency. But it is not yet a game changer. Cross-border payments still face issues — such as monetary sovereignty and regulatory requirements — and raise challenges for monetary authorities in managing cross-border capital flows. Increasing foreign users’ willingness to adopt a new digital currency is even more challenging because such a decision goes beyond economic rationales to factors such as trust and data protection.
China’s growing share in the world economy will support greater use of the renminbi. The use of the digital renminbi is unlikely to present any more of a threat to the dollar’s international dominance than the renminbi’s current forms in the short or medium term. The dollar’s status as an international currency has been supported by the unparalleled liquidity, depth and strength of the US financial system, capital markets, robust institutions and strong property rights. A digital renminbi will not undermine those conditions, especially as COVID-19 has re-enforced the dollar’s status and shown that there are few alternatives as a safe-haven currency.
As the digital renminbi is still a work in progress, it might be too early to rule out the possibility of greater cross-border payments. In its latest annual report on the digital renminbi, the PBOC said that there would be more testing of cross-border use based on domestic practices and international demand in line with the principles of compliance, interoperability and no disruption.
It is also a logical move if the PBOC, as a central bank digital currency frontrunner, is willing to participate and take the lead in setting standards and a regulatory framework in this arena. But the PBOC is aware that such attempts can only be accomplished through collaboration with other central banks, monetary authorities and international financial institutions.
The PBOC has joined the Multiple Central Bank Digital Currency Bridge with the Central Bank of the United Arab Emirates, the Bank of Thailand and the Hong Kong Monetary Authority, and participated in the BIS Innovation Hub to explore proof of concept and prototypes to facilitate cross-border foreign exchange payments. These efforts are a good start for building future payment systems and emphasise the importance of international cooperation in accomplishing such ambitions.
Haihong Gao is Professor and Director of the Research Centre for International Finance at the Institute of World Economics and Politics, Chinese Academy of Social Sciences.