The limiting factors are policy and politics, not technology.Įven the technological case for e CNY is far from clear-cut. China’s insistence on maintaining far tighter capital controls than any other major economy, as well as deep-seated doubts about its political system, blunt the yuan’s appeal. When deciding which currencies to use, companies and investors consider how easily they can make conversions to other currencies how freely they can invest them and whether they trust the issuing countries’ legal systems. But that misunderstands why it accounts for just 2% of international payments today, about the same as the Canadian dollar. The final bold claim is that e CNY will catapult the yuan to global status. That would be a mistake,” says Yu Yongding, a former adviser to the central bank. “We don’t want to go back to central planning. Moreover, few serious economists in Beijing like the idea of a 100% e CNY money supply, in which the government could directly control how banks lend. It does not want savers to switch out of bank deposits en masse into e CNY, which would make it harder for banks to fund themselves. The government is wary of undermining the financial system. Granted, the central bank may in time expand the e CNY’s role. And it will probably place low ceilings on how much people can hold. It will distribute e CNY through commercial banks, which in turn will make it available to the public. The central bank will replace only a small portion of base money, known as M0, with e CNY, leaving the rest of the money supply undisturbed (see chart 2). But its design will circumscribe its role. The e CNY, one might assume, will make targeting more precise. More recently it has instructed banks to lower interest rates for small firms. Since 2015, for instance, it has created hundreds of billions of yuan for the construction of affordable housing. This, however, both understates what the central bank can already do and overstates what the e CNY will let it do.Ĭhina already manages both the money supply and interest rates with different sectors in mind. According to this view, the central bank will be able to program money to be used for specific purposes and at predefined times. The second bold claim about e CNY is that it will reshape monetary policy in China. And so long as millions of older citizens do not much like paying for things with smartphones, the government will not phase out cash. The upshot is that, even without e CNY, regulators have no real blind spots left, apart from old-fashioned cash. For mobile payments that do not touch banks, officials can demand a record and, says an industry insider, may soon require real-time reporting, too. In both cases regulators can see how people spend in real time. Similarly, foreign-exchange transactions take place on the China Foreign Exchange Trade System. These must pass through NetsUnion, a central clearing platform. Most mobile payments today involve a bank card, tethered to users’ accounts on Alipay or WeChat. But it is a limited gain compared with its existing powers. Start with the first claim, that digitisation offers unmatched surveillance abilities, letting the state track all spending. “The digital yuan is not magic, so we don’t expect magic from it,” says Gary Liu of the China Financial Reform Institute in Shanghai. The design of the e CNY, and the nature of China’s economic system, mean that each of these claims is unlikely to be realised soon. Within China, however, many economists are far less bullish. Now three bold claims are being made about it: that it will dramatically enhance China’s surveillance capabilities that it will allow the state to wield far more control over money and that it will challenge the dollar for prominence. China’s digital currency was first conceived as a way to curb the big mobile-money providers.
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