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Wednesday, May 26, 2021, 00:32
Digital yuan good for HK's international financial hub status
By Oriol Caudevilla
Wednesday, May 26, 2021, 00:32 By Oriol Caudevilla

Central bank digital currencies have been referred to as “the future of payments”, or even “the future of money”, and not without reason. One thing is for sure: Technological change is upending finance.

The pandemic has turbocharged a global financial technology revolution. COVID-19 is changing consumer behavior, quite likely forever.

A CBDC is a new form of central bank money accessible to the public, accepted as a means of payment, legal tender, safe store of value by all citizens, businesses, and government agencies.

That “future”, though, is closer than it might appear, at least in China, the only major economy whose CBDC project, the digital yuan, is at a more advanced stage.In China, we can talk about a “present” rather than a “future”, since it will be the first major economy to deploy its own CBDC, during the 2022 Winter Olympic Games in Beijing. 

There are many possible motivations behind CBDCs: They can replace physical notes; they can be used to improve financial stability as a monetary policy tool, to promote financial inclusion, to fight against financial crime, etc. As I have mentioned in previous articles, one of China’s main objectives is believed to be to leverage the digital yuan to facilitate a much wider cross-border adoption of China’s currency. To put it another way, the goal is to expand the renminbi’s role in international trade.

While the tests in the Chinese mainland focus on domestic transactions, it will be in Hong Kong (and Macao) where China will test the digital yuan for cross-border payments

This is where Hong Kong will play a key role: While the tests in the Chinese mainland focus on domestic transactions, it will be in Hong Kong (and Macao) where China will test the digital yuan for cross-border payments. 

On Dec 4, Hong Kong Monetary Authority Chief Executive Eddie Yue Wai-man announced that the HKMA and the Digital Currency Institute of the People’s Bank of China were discussing the technical pilot testing of using the digital yuan for cross-border payments and were making the corresponding technical preparations.

As reported by Bloomberg on May 13, this initial test phase in Hong Kong had just finished satisfactorily, with the special administrative region currently in talks with the mainland authorities to expand cross-border testing of the digital yuan.

The HKMA tested, in this first phase, the use of the related app, system connectivity and certain use cases such as cross-border purchases, and is currently discussing and collaborating with the PBOC on the next phase of technical testing, including the feasibility of broadening and deepening the use of the e-CNY wallet for cross-border payments.

According to the latest report published by the international management consulting firm Oliver Wyman, the digital yuan in Hong Kong may usher in an era of quicker, cheaper cross-border payment and clearing processes.

In the near term, not much change is expected given the market structure and PBOC’s focus on consumer sectors. But in the longer term, change is to accelerate, especially in areas such as the Guangdong-Hong Kong-Macao Greater Bay Area — which is already a hub of innovation — and increasing integration of onshore and offshore markets. Here payment infrastructure integration is expected to start, beginning with retail but quickly moving into B2B, the Oliver Wyman report reckons.

However, the digital yuan does not aim to replace the Hong Kong dollar, since the tests in Hong Kong and Macao (and its future deployment once the tests are complete) will aim at cross-border transactions. Since Hong Kong is one of the most open and global cities in the Greater Bay Area, China will be able to leverage this circumstance to promote its digital currency on a global stage, so it is undoubtedly a win-win for all parties involved.

Given the fact that China, through the 14th Five-Year Plan (2021-25), has once again recognized Hong Kong’s potential on the national level while putting the general focus on technology and innovation, the best way for Hong Kong to align with this focus on technological innovation is precisely to keep doing what it is doing now and to keep involving as many stakeholders as possible in the digital yuan tests.

China’s rationale behind its digital yuan is multifaceted, but one of the major reasons behind it is to facilitate the cross-border adoption of its new digital currency and the internationalization of the renminbi. Therefore, promotion of the digital yuan is in China’s interest — not only to make the digital yuan an effective domestic tool for facilitating consumers’ retail payments, but also to enhance the yuan as a payment currency in the global financial system.

Hong Kong is in a perfect position to leverage the digital yuan tests and future deployment to enhance its status as one of the world’s most important financial centers, whereas the mainland is in a perfect position to leverage Hong Kong’s expertise and status to test and roll out the digital yuan for cross-border payments. Undoubtedly, a win-win situation.

The author works as a fintech adviser and researcher. He has worked as a business analyst for a Hong Kong publicly listed company.

The views do not necessarily reflect those of China Daily. 

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