China preps for digital yuan launch

The People’s Bank of China in Beijing. The Japan News/Asia News Network

BEIJING — The People’s Bank of China (PBC) has completed the design and development of an electronic legal currency, the digital yuan.

As Facebook’s virtual currency to be called Libra is increasingly facing restrictions, China is likely to lead the way in issuing digital currencies.

Phased introduction

“The design and development work have essentially been completed,” Chinese media reported a senior official at the Chinese central bank as saying Thursday in a speech,  As a next step, the bank plans to select areas for trial distribution and steadily introduce the system.

Last Tuesday, former PBC Gov. Zhou Xiaochuan said in a speech that digital currencies have two goals: domestic retail settlements and international settlements.

“China will focus on retail payments and use the strategy as a basis for expanding its use,” Zhou said.

To reduce the impact of any problems, the bank is likely to take a step-by-step approach toward handling international payments. Digital yuan are unlikely to invite criticism if limited to the domestic market, in contrast with Libra.

2-layer structure

According to PBC Gov. Yi Gang’s remarks at a press conference and the transcripts of lectures by senior central bank officials, the digital yuan, or digital renminbi, is an electronic legal currency that has the same value as cash and will replace some notes and coins.

Digital yuan are to be supplied through a “two-layer structure” mediated by commercial banks. If the central bank provided digital yuan directly to users without going through commercial banks, financial intermediary functions such as bank financing would weaken, having a negative impact on the economy.

The digital currency will mimic the current flow of cash, in order not to undermine the effectiveness of China’s monetary policy and its banking system, which operates through commercial banks.

It is unknown which financial institutions will serve as the contact points for consumers, but likely candidates are the four major state-owned banks including the Industrial and Commercial Bank of China as well as Alibaba Group Holding Ltd. and Tencent, which handle smartphone payments.

Users get digital yuan by exchanging cash with these institutions and put it in a digital wallet on their smartphone. Unlike smartphone payments, which have begun to spread in Japan, users will be able to make payments and remittances while shopping by lightly tapping their smartphones against each other, even if they do not have an internet connection. So-called controllable anonymity at the time of use will be secured, a senior PBC official said.

Threat from Libra

PBC began studying digital currencies in 2014. It has more than 70 patents pending and has specialized research facilities. In this field, China stands out among the world’s central banks.

The PBC’s sudden move toward digital currency is believed to have been prompted by concerns over Libra and speculation over currency hegemony.

Libra is known as a “stable coin” among cryptocurrency assets with a relatively stable price backed mainly by U.S. dollars. Libra are issued by the Libra Association made up of private companies, and this structure conflicts with the idea that “currency is a symbol of national sovereignty,” Zhou said.

China apparently believes that the spread of Libra, which do not include yuan in its underlying assets, ahead of the spread of digital yuan could hamper the internationalization of renminbi and create loopholes in regulations on capital outflow.