Published: 10:33, November 9, 2020 | Updated: 12:04, June 5, 2023
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Digital yuan gaining wider currency
By Chen Jia

A customer uses the central bank's digital currency to pay for books at a store in Shenzhen on Oct 13. (CHAI HUA / CHINA DAILY)

When China's years-long efforts for a cashless society bore fruit in Shenzhen, Guangdong province, on Oct 12, some 50,000 lucky residents of the southern boomtown, winners of a lottery, received the first batch of DC/EP, or digital currency/electronic payment.

DC/EP was issued in the form of hongbao, or electronic red packets, worth 200 yuan (US$29.9) each. Some of the winners recalled that 2,000 years ago, the reigning emperor of the Qin Dynasty (221-206BC) unified China for the first time by exhorting Chinese people to use a single currency. Back then, the only legal tender of the empire was made in gold or copper.

Although backed by the People's Bank of China, the central bank, DC/EP still has to pass numerous complex tests before it can be introduced across the world's most populous nation.

Because DC/EP is not from the private sector, but permitted by the nation's law to be circulated within the national jurisdiction, it has attracted attention from all over the world. It marks a new chapter in the development of China's financial technology, or fintech sector, which is already a pioneer in electronic payments, direct loan transfers, microcredit, peer-to-peer lending and innovative crowdfunding.

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DC/EP is also in line with the proposals made for the formulation of the nation's 14th Five-Year Plan (2021-25) that stress science, technology and innovation, analysts said.

A meeting of China's top leadership in late October highlighted that innovation will be at the core of development of modern Chinese society. China will make major progress in developing core technologies in key areas and become a global leader in innovation. The nation's economic and technological strengths are projected to rise significantly by 2035.

Some select cities besides Shenzhen have joined the digital yuan trials, in the run-up to the 2022 Winter Olympic Games in China. Yi Zhaoxia, a manager of Shenzhen Publication & Distribution Group's store in Luohu district, where the DC/EP trial was launched, said he has updated the operating system on the point-of-sale terminals to deal in the digital renminbi.

Some of the lucky winners of DC/EP in Shenzhen spent the embedded money at Yi's bookstore by scanning a QR code on their smartphones. It's a drill they, as users of mobile payment tools Alipay and WeChat Pay, are familiar with.

The money in their digital red packets was paid by the district government's finance department. The idea was to encourage consumption and offset the economic impact of the COVID-19 epidemic. Restaurants and supermarkets are among the 3,000 commercial establishments that are participating in the DC/EP trial. They offer related discounts to encourage consumers to use the digital renminbi.

DC/EP is different from both Alipay and WeChat Pay. While the government-backed DC/EP is the underlying currency, the two mobile payment tools are private-sector digital mechanisms to pay in yuan electronically. Hence, DC/EP would not sound the death knell for mobile payment tools.

DC/EP transactions entail smart contracts whose records are maintained, thereby ensuring fool-proof security. Alipay and WeChat Pay are more like digital wallets to keep a certain currency to make mobile payments. While DC/EP is digital cash itself, mobile payment tools are part of the country's financial infrastructure, said a senior PBOC official.

So, in practical terms, DC/EP is not a competitor to Alipay and WeChat Pay. Rather, Alipay and WeChat Pay can function as digital wallets in which people can keep their DC/EP.

The public in China can exchange local currency from their bank accounts for DC/EP at certain qualified commercial banks, said Mu Changchun, head of the PBOC's digital currency research institute.

The digital yuan is legal money available digitally. Conceivably, in the future, when adequate DC/EP is issued by the PBOC, and accepted at all POS terminals and elsewhere, people can use it just like paper notes and coins. Toward this end, the PBOC has started consultations with the public to revise a related law for clarity that "the renminbi has both physical and digital types".

The digital currency could create value and we should start thinking about how to establish a new type of financial system through digital currency.

Jack Ma, founder of Alibaba Group

DC/EP could also serve as a back-up for electronic payments in the event of extreme situations like, say, a platform collapsing suddenly or when it needs to be closed at short notice, the PBOC official said.

"The digital currency could create value and we should start thinking about how to establish a new type of financial system through digital currency," said Alibaba Group founder Jack Ma.

Alibaba's Ant Group has participated in the central bank's digital currency designing process and trials. In about 30 years, the digital currency will likely prove to be a very significant innovation for the world's financial system. "The market should tell what kind of problems the digital currency could solve, not told by the regulators or research institutions", and these issues include global economic growth, sustainable trade, green and inclusive development, said Ma.

The PBOC will spearhead the country's digital currency issuance and management system, which will control the issuance quota, and conduct unified technical, security and application standards. More importantly, it will manage digital renminbi wallets, which will allow users to draw money from their electronic devices.

In this respect, DC/EP will be different from the distributed ledger used by private-sector, decentralized cryptocurrencies such as Bitcoin and Facebook-backed Libra, which are not allowed to be used in China as legal money, while trading in crypto assets was banned earlier.

Chinese monetary authorities chose a centralized design approach, which will record all transactions of the digital currency in the central bank's own ledger.

China accelerated its research into digital renminbi last year as the central bank desired to stay ahead of evolving currencies and payment systems, amid talk that Facebook's Libra and other popular cryptocurrencies could potentially disrupt existing monetary systems globally.

DC/EP trials have confirmed China as a forerunner in research and development of digital currency and also as a global leader in electronic payments, ahead of the United States and Europe.

A report jointly issued by the Group of Seven and the Bank for International Settlements outlined certain common principles and the key features a central bank digital currency, or CBDC, should have. One of the key features is that the new currency's issuance should not compromise monetary or financial stability. Also, it should coexist with and complement existing forms of money.

The digital renminbi is significantly different from CBDC though. "The G7 attaches great attention to cross-border payments and responses to Libra, while the Chinese digital renminbi focuses on improvement of domestic retail payments system," said Zhou Xiaochuan, former governor of the PBOC.

China's "two-tier design framework" of the digital renminbi, which allows the central bank to deliver digital currency to commercial banks first, and then to retail users, will better solve the problem of "financial disintermediation", said Fan Yifei, vice-governor of the PBOC.

A recent survey found that 80 percent of the world's central banks are engaged in exploring CBDC and half have progressed past conceptual research into experimenting and running pilots.

Most of the central banks such as the European Central Bank and the US Federal Reserve are cautious about adopting digital currencies, including those issued by foreign counterparts. Central banks fear that use of digital currencies may threaten a country's financial, economic and political sovereignty.

Adoption of digital currencies, they fear, could squeeze deposits in commercial banks as people may shift money into sovereign-backed central bank account for safety. Another concern is about loss of privacy as the central bank, if it so desires, could figure out how, where, when and what for the digital money is used.

The G7/BIS report said the speed of innovation in payments and evolution of various money forms mean that questions like where and how a central bank should play a direct role in a financial ecosystem, and what the appropriate role might be for private participation, are ever more urgent.

The latest G20 meeting involving finance ministers and central bank governors held in early October urged that no so-called global stable coins, a type of digital currency supported by bank reserves and for cross-border usage, "should commence operation until all relevant legal, regulatory and oversight requirements are adequately addressed through appropriate design and by adhering to applicable standards".

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Chai Hua in Shenzhen contributed to this story.

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