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China struggles to launch digital yuan after 8 years of trials

Written by Nikkei Asia Published on   3 mins read

Alipay, WeChat Pay mobile payments dull appeal of central bank’s efforts.

Eight years after China first embarked on the path toward a digital yuan, the central bank’s pilot program for the digital yuan has been expanded to 23 cities covering nearly one-fifth of the population.

But a full launch of the currency remains elusive as a population already used to mobile payments such as Alipay and WeChat Pay sees no reason to abandon their familiar apps.

“I was able to pay using the digital yuan at my neighborhood eatery,” said Lin, who owns a food processing company in Fuzhou, China. “It’s not any different from mobile payments.”

At a meeting in March, the People’s Bank of China doubled the number of cities participating in its pilot program, allowing residents to shop and take public transportation using the digital yuan. Fuzhou was among the additions, along with Tianjin, Chongqing, and Hangzhou.

A PBOC task force began studying central bank digital currencies in 2014, and the pilot kicked off in October 2020 in Shenzhen. As of the end of last year, 216 million, or around 20% of China’s population, had created a digital wallet on the central bank’s app.

“We have overcome challenges like lags in processing payment information,” a central bank source said.

But there is still no clear timeline on a full launch, which some had predicted could come as early as soon after the Beijing Winter Olympics in February.

The digital yuan has struggled to gain momentum partly because users see little difference between it and established mobile payment apps. China has a big problem with counterfeit bills, and around 80% of all retail purchases in China are now made through the likes of WeChat Pay and Alipay, according to one estimate.

The digital yuan has some advantages over these apps. Retailers do not pay fees on digital yuan payments. Transactions can be made without an internet connection using so-called near-field communication terminals, which can come in handy during natural disasters.

Still, they have not been enough to convince the public to switch from their usual apps. The PBOC in its March meeting said it will need to work on the digital yuan’s convenience and innovation.

The digital yuan is considered an important tool in China’s rivalry with the US. Russia was cut off from the dollar and euro over its invasion of Ukraine. Globalizing its currency, including by easing restrictions and encouraging settlements in digital yuan, is seen as crucial for China’s economic security.

Chinese President Xi Jinping wants to ensure economic and social stability ahead of the twice-a-decade Communist Party congress this fall, and is not expected to rock the boat by moving forward on the digital yuan before then.

“China is ahead of other major economies, so there’s no need to rush,” said a government source.

Some emerging economies have already officially issued digital money, while the Bank of Japan has started trials.

“This is not something that’s so far off that it won’t become reality for another ten years,” said Masashi Nakajima, an expert in the field at Reitaku University in Japan’s Chiba Prefecture.

The BOJ started looking into a central bank digital currency, or a CBDC, in 2020. In March, the central bank wrapped up the first of three phases into the inquiry, which pored over basic functions such as issuance and money transfers. The ongoing second phase will test ownership limits, transaction frequencies, and transaction amounts.

A CBDC would eliminate the costs associated with printing paper money and minting coins. The official digital currency would also leave a paper trail that will make it easier to catch criminals.

But the idea of having a central bank oversee tranches of ledger data has given rise to privacy concerns. There is a host of other questions concerning CBDCs, like how to process payments in environments with no network connections, and whether the current financial ecosystem would collapse if banks no longer play a central role.

Cambodia and the Bahamas finished testing their CBDCs in 2020 and officially adopted them. The European Union is poised to roll out a digital euro in 2026, and the US Federal Reserve is taking public comments about the subject this year.

The BOJ, however, has yet to disclose a timetable for issuing a digital yen.

“Japan is not lagging in its examination, but compared to Europe, whose activities are predicated on introducing [a CBDC], a disparity may develop in the future,” said Nakajima.

This article first appeared on Nikkei Asia. It has been republished here as part of 36Kr’s ongoing partnership with Nikkei.


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