China has been working for five years on the use of a digital currency. To escape the yoke of the dollar system, the government has encouraged the use of its currency in international transactions since 2010. In 2018, it launched yuan oil futures contracts. The Chinese authorities have just broadened access to Chinese assets to stimulate the use of its currency. But that’s not enough, the country that could become the leader in digital field (see the article by Jean-Dominique Seval, in French) has been working since 2014 on the use of a digital currency 数字货币- DCEP for Digital Currency Electronic Payment. While several cities, such as Suzhou or Shenzhen, have started to test its use, the media in recent weeks have increased the number of articles and programs on the subject to praise its benefits. Let’s see the reasons, the difference with the applications used in China,, and the objections.
The first official reason given is the fight against financial crime, money laundering and corruption. Indeed, by tracking transactions, the Central Bank could more easily locate offences. Moreover, this would avoid the mountains of cash amassed from officials with large open pockets, as the latest anti-corruption campaign has shown.
This currency would help to mitigate capital flight. China has in recent years tightened its foreign exchange export controls for individuals and companies, but there are still plenty of ways to circumvent the regulations.
It would counter crypto-currencies, which China cannot control and which allow greater freedom of capital.
Several leaders of the banking authorities have made no secret of their desire to free themselves from the international payment systems where the dollar is king, SWIFT (Society for Worldwide Interbank Financial Telecommunication) and CHIPS (Clearing House Interbank Payments System). Last year, in front of the American trade war, the Chinese authorities to speed up the project and the official media proclaim that this currency offers an alternative to the dollar settlement system while making it possible to mitigate the impact of possible sanctions or exclusions of a country or companies.
Identical to the local currency
The central bank has specified that digital currency has the same characteristics as local currency. Payment cannot be refused by a merchant. Its value is equal to the yuan. Today, in China, one can do without cash and credit cards for the vast majority of expenses by using the payment methods of We Chat 微信 or Alipay 支付宝. You can even feel like a silly person when you take a coin or a bill out of your pocket! But, what are the differences with the fashionable payment methods?
Differences with Alipay and We Chat
For both applications, the accounts must be linked to existing bank accounts, whereas for the DCEP, the user does not need a bank account. The Central Bank delegates the management to payment and banking institutions but the opening of an account will not be mandatory, it will be sufficient to deposit money in a special account. Nuance? It is fine! He will need to download the application of the Central Bank. Nearly 200 million Chinese have no bank account. An advantage for this new currency. A merchant is not obliged to accept these applications, on the contrary for the currency.To use Alipay and We Chat, a connection is essential, whereas for digital currency, only one phone will be needed, which will be put in front of the other phone to carry out the transaction.
Does the arrival of DCEP herald the death of these flagship applications? Can we be satisfied with the official discourse that sees two complementary means?
The differences with crypto currency
This currency is more secure than a crypto currency, such as Bitcoin, because it is guaranteed by the Central Bank, so stability would be assured.The Chinese government points out that it is legal, unlike Bitcoin…
Of course, the critics of this project retort that it is a way to control, monitor the population more and make the ticket board work at a lower cost.
The desire to get out of the dollar system is probably the primary motivation for the introduction of this digital currency. Its widespread use would give greater independence and help to better manage capital outflows. There is still a long way to go. Will this project be successful? The United States is also nurturing a digital dollar project. Will the two powers still be competing on this front?
10 June 2020