China's Digital Currency and Yuan Internationalization
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In July of this year, the People’s Bank of China launched its latest and largest test of their digital, blockchain currency, the DCEP. The development of the DCEP has been partially driven by a desire to proliferate the yuan into the international financial system and establish it as a key rival to the dollar’s dominance. With DCEP’s development occurring at the same time as China’s Belt and Road Initiative, the central government is planning to link two of their flagship initiatives to push yuan Internationalization.
Since the launch of the BRI, China has been frustrated by the stubborn resilience of the dollar in Asian markets. Initially, when it began investing, it expected other countries to adopt the RMB just as Europe had done pre-Brenton Woods with the German Mark. However, risk averse Asian economies tried to avoid taking on debt in RMB, demanding loans be denominated in the dollar. This reluctance had become a serious problem for Beijing as it had hoped that the capture of Asian economies in the RMB currency umbrella would allow it to not only begin the process of internationalization but also bypass Western sanctions to an extent.
Simultaneously, Asian markets have been resistant to Chinese fintech apps such as Ant Financial’s Alipay and Tencent’s WeChat Pay which have already revolutionized Chinese merchant transactions. This was largely due to those markets already being dominated by American software products, making it more difficult for Chinese players to break through.
However, with the launch of the DCEP and the BRI’s Digital Silk Road, Beijing is aiming to eliminate two problems at once. Currently, East Asian countries are attempting to digitize their financial markets which are mainly cash-based and they are looking to the Chinese model for guidance. During China’s transition away from cash, it leapfrogged the Western credit card model by going straight from cash to digital fintech app transactions. China’s hope is that the BRI’s digital component will fund the digital infrastructure (e.g. fiber optics and database infrastructure) of these countries in order to facilitate their adoption of financial apps. While China is building these East Asian countries’ digital infrastructure, it is also integrating the DCEP into their fintech giants such as Alipay’s recent partner, Unionpay, which has close links to the big five Chinese state-banks. Thus, by funding the digital infrastructure of East Asian economies, China hopes to give their fintech companies a foothold in these markets and, by extension, the DCEP and the yuan.
