BIG IDEA | ‘China's new digital renminbi by itself will not help the currency to challenge the US dollar’s global dominance.’

‘Its true significance instead lies in its potential to shift the competitive balance of power between the country’s technology giants and traditional banks.’

‘While many central banks are still investigating the possibility of issuing a digital currency, China has rolled out a digital currency via a series of pilot programs since last year.’

• ‘The eRMB (my term as opposed to the more awkward official DC/EP) by itself will not help the renminbi to challenge the US dollar’s global dominance.’
• ‘Its true significance instead lies in its potential to alter the balance between China’s technology giants and traditional majority state-owned banks, thus indirectly enhancing the banks’ international competitiveness.’

‘The pilot programs employ a two-tier structure with “controlled anonymity.” ’

• ‘The People’s Bank of China (PBOC, the central bank) issues eRMB to an authorized group of large state-owned banks and other selected financial institutions, which then make the money available to households and firms – the digital currency’s ultimate users.’

‘In the pilot schemes, eRMB were distributed to randomly chosen individuals via free digital gifts. At the full-scale launch, the government will have several tools at its disposal to encourage wider use.’

• ‘For example, it could pay the salaries of government and state-owned firms’ employees – some 15% of the workforce – and public-sector pensions in eRMB.’
• ‘Government procurement programs, transfers to low-income households, and subsidies to firms also can be carried out in the new currency.’
• ‘In addition, the government could require citizens to pay a progressively higher proportion of income taxes and other public-sector fees in eRMB.’

‘A significant consequence of the eRMB that Chinese officials have not publicly discussed is its potential to alter the balance of power between China’s banks and Big Tech firms.’

• ‘Traditional banks, which have been losing market share to the digital giants in both money management and lending, are probably cheering.’

‘One of Big Tech’s advantages over traditional banks is the accumulation of “soft information,” such as customer reviews of the firm’s products and services, and product return rates.’

• 'Under controlled anonymity for the eRMB, the PBOC will gain a similar ability to monitor what is otherwise invisible to banks.’
• ‘And this could reduce or even eliminate Big Tech’s information advantage.’

‘The eventual international use of the eRMB will depend on a number of factors.’

‘As China’s global trade and financial importance grows, more transactions will be settled in renminbi.’

• ‘Chinese state-owned firms could insist on settling a portion of their international transactions in renminbi, while the PBOC could sign more swap agreements involving the currency.’

‘But Chinese capital controls, as well as the relatively small amount of liquid renminbi-denominated assets that can be bought and sold by international investors, will limit the currency’s international uptake.’

• ‘Reforms in these areas, on the other hand, can promote its adoption.’

‘US policy also will play a role.’

• ‘The US authorities could, for example, discourage American financial institutions from using the renminbi.’
• ‘Ironically, frequent US financial sanctions that exploit the dollar’s privileged global position could promote the emergence of alternatives to the greenback, including the renminbi.’

‘The eRMB on its own will not advance the renminbi’s internationalization.’

• ‘Its main impact is likely to be a rebalancing of power between the banks and the Big Techs at home.’