China’s Digital Currency: A Boon for People, Productivity and Power

September 23, 2019
Editor(s): Matthew Trachevski
Writer(s): Preethika Padmanabhan, Lachlan Woods, Nicholas Bea, Michelle Koo

China has recently surprised the market, especially the crypto sector, by announcing that they are almost ready to launch a digital currency called Renminbi to replace physical cash for the payments sector. Some speculate that China is trying to catch up with Facebook’s Libra launch due to concerns over the fact that Libra might strengthen the US dollar’s influence in the global financial system. Nevertheless, this announcement has sparked conversation about national digital currency to be taken into serious consideration with the expectation for other countries to follow suit without delay. Major economies, such as the U.S. and the Bank of England, have discussed and touched on digital currency before, however none of the major countries have indicated a solid plan and time for real action to take place. With this, exploration regarding National Digital Currency including benefits and issues to be concerned about will be discussed.

Digital currency created by a central bank in essence means that existing digital account services are offered to a broader range of users. The main difference with the current monetary system is that digital currency does not have a tangible cash form, however the choice to convert to physical currency is available. Countries have actually taken national digital currency into consideration for it provide wide-ranging implications for monetary policy and financial stability.

For instance, digital currency is effectively believed to counter the rise of new cryptocurrencies in which payments are made outside the country’s control. Countering the volatility of cryptocurrencies, a national digital currency that is also convertible to physical money will allow for a more stable payment method. Next, the shift towards a cashless society can accommodate more productivity and cost reductions as there will no longer be the need to manage money and pay for charges for businesses and individuals. Moreover, national digital currency will make tax evasion and illegal economic activity significantly more difficult to undertake. In a situation where the central bank needs to lower interest rates, national digital currency will make this easier, to the extent below zero. Furthermore, in developing economies, where access to finance is limited, digital currency could widen inclusion by making digital payment method available to extended demography.

In relation to China, part of the motivation to adopt national digital currency is to protect China’s monetary control. China has one of the most successful and developed electronic payment platforms, however they need a platform that can also protect its monetary control and have digital legal currency status. In addition to this, digital currency is easier to trace, which would allow China’s central bank to track and monitor transactions that could reduce corruption, improve monetary policy, and provide the Chinese government with oversight of transactions with reduced transaction costs. China has stated that an advantage of having central bank issued digital currency over private company-owned payment services is that commercial companies have the probability of going bankrupt, resulting in users of the services also going bankrupt. This would also equip balance of payments being kept anonymous and prevent money laundering. China’s step forward towards the adoption of digital currency is that they are creating a new public infrastructure for payments. This first step could lead to future innovation in the payment sector for this open payment infrastructure by China to become a public service accessible for most people.

Despite all the positive attributes national digital currency exhibits, there are still concerns regarding the implementation and use of it. Firstly, the likelihood of cyberattacks taking place has to be taken into consideration, for it would infiltrate the supposedly protected account of users. Secondly, there are spillovers affecting other countries. The significant ease of shifting deposits in and out of the country to foreign assets would intensify the flows of capital according to market sentiment towards domestic banks, which affects the credit cycle in the home country. If there is a significant credit cycle in one country, this would mean there are either large booms or troughs for its partnering countries. This could lead to people abandoning their own banks in their home country and instead deposit to foreign banks with digital central banking. It also suggests that in times of crisis when capital flight is difficult, access to foreign digital currency will eliminate this difficulty and allow for ease in flight to safety and worsen a home country’s situation. On a more micro-scale, a transition to digital currency is feared to cause less use of accounts in traditional banks. Consumers choosing to hold an account at the central bank and affecting the broader traditional financial system can cause financial turbulence. Moreover, the volatility of a business cycle can worsen.

In the context of China, concerns relate to the fact that centralized design of national digital currency held by the central bank means that they have great control and overview of activities and transactions. There is a possibility of power abuse including censor transactions, tracking individual activities, and becoming a tool to monitor those who are loyal to the government. With the ongoing concern of the Chinese governments’ scrutiny, censorship, and the ‘social credit’ system used to rate citizens, fear of intensified surveillance is not an unexpected concern needed to be critically considered.

National Digital Currency can be positively viewed as a move forward with all the benefits it provides. Issues regarding national digital currency could be avoided if all central banks globally can agree to act under a certain system; however, history suggests that this is almost impossible. Privacy and government’s ability to abuse certain power are also concerns that have to be considered. With this, China’s fast-paced progress and aggressive innovative strategic actions should pressure other countries, especially countries with major economies, to lead innovation and start to execute their plans rather than sit back and observe how new systems pan out.

References

  1. Faden, M. (2018). National Digital Currencies as Payment Methods. Retrieved from https://www.americanexpress.com/us/foreign-exchange/articles/national-digital-currencies-and-payment-methods/
  2. Yates, T. (2018). The consequences of allowing a cryptocurrency takeover, or trying to head one off. Retrieved from https://ftalphaville.ft.com/2017/06/07/2189849/guest-post-the-consequences-of-allowing-a-cryptocurrency-takeover-or-trying-to-head-one-off/
  3. Orcutt, M. (2019). China is about to launch its own digital currency. Here’s what we know so far. Retrieved from https://www.technologyreview.com/f/614314/china-is-about-to-launch-its-own-digital-currency-heres-what-we-know-so-far/
  4. Sesameopen, H. (2019). Wake up, US Federal Reserve! China just showed how digital currency is done. Retrieved from https://venturebeat.com/2019/09/15/wake-up-us-federal-reserve-china-just-showed-how-digital-currency-is-done/

The CAINZ Digest is published by CAINZ, a student society affiliated with the Faculty of Business at the University of Melbourne. Opinions published are not necessarily those of the publishers, printers or editors. CAINZ, its Partners and the University of Melbourne do not accept any responsibility for the accuracy of information contained in the publication.

Meet our authors:

Matthew Trachevski
Editor
Preethika Padmanabhan
Writer
Lachlan Woods
Writer
Nicholas Bea
Writer
Michelle Koo
Writer