Speaking at the Hong Kong Monetary Authority-Bank for International Settlements Conference, held in November in Hong Kong, the former head of the People’s Bank of China Zhou Xiaochuan confirmed that 90 percent of payments in China are already digitized.

He noted that progress with a central bank digital currency (CBDC) in China is “already on track” and the “final stage is not very far away”. Furthermore, he said that after China establishes a CBDC, there will be other features the government can develop, such as cross-border payments and applications of tokenization like smart contracts.

This is indeed very relevant, since the scale and pace of CBDC deployment in China is so far unmatched anywhere else in the world. When I say anywhere else in the world, I am referring to the world’s bigger economies, since there are smaller countries that have already deployed a CBDC.

Moreover, I also think that what Zhou mentioned regarding cross-border payments is also very relevant, and is in line with what I have written about concerning the digital yuan (e-CNY) over the past three years.

First, we must remember that CBDCs are a new form of central bank money accessible to the public, accepted as a means of payment, as legal tender, and are a safe store of value for all citizens, businesses and government agencies. While more than 80 percent of central banks in the world are currently working on CBDCs (with some just at the initial research stages), Asia is where CBDCs have generated the most interest — and the major economy leading the CBDC race in Asia (and globally) is China, as I mentioned before.

China is certainly streets ahead in terms of digital payments and the e-CNY doesn’t disrupt existing ways to pay (with QR codes and face-recognition payments already being widely used in China through Alipay and WeChat Pay). However, the biggest innovation is its ability to use smart contract technology. The Guangdong-Hong Kong-Macao Greater Bay Area, especially the Hong Kong Special Administrative Region, boasts inherent advantages in the development of blockchain technology.

Through smart contracts, users can agree on the use time, use scope and use rules: nontransferable, nonredeemable, time-out recovery, targeted use, targeted crowd, targeted scene, consumer welfare, coupon reduction, and designed merchant consumption.

The e-CNY provides many other advantages: No interest, low cost, payment and settlement, controllable anonymity, security, and dual offline payment

The e-CNY provides many other advantages: No interest, low cost, payment and settlement, controllable anonymity, security, and dual offline payment. Alipay, WeChat Pay and bank wallets remain the same, however — the e-CNY is simply the money in those wallets, as China’s legal tender is issued by China’s central bank.

Focusing on the idea of the digital yuan being used for cross-border payments, China’s e-CNY will be beneficial in many different ways, but one of the areas where it can bring more value is in promoting the use of the yuan for cross-border payments, thereby converting some of the US dollar-denominated international trade transactions into renminbi-denominated ones, and challenging the dominance of the US dollar in international trade and finance. 

This will not happen overnight, but if there is enough penetration and acceptance of the digital renminbi in a separate jurisdiction or region, it is conceivable that a trade and finance system parallel to the US dollar system can gain critical mass, a system that can allow certain countries to bypass the global banking system and US sanctions.

To my way of thinking, the countries participating in the Belt and Road Initiative (BRI) are the best possible candidates for China to start internationalizing its digital yuan, along with those participating in the Regional Comprehensive Economic Partnership (RCEP), without neglecting the important role that Hong Kong can play in this.

The  Belt and Road is a key initiative for China, and consequently it is perfectly possible to imagine how beneficial the expansion of the digital yuan can become to China and to participating countries.

Thanks to the RCEP, which was signed on Nov 15, 2020, China will strengthen its trade ties with neighboring countries, and also be able to leverage agreements to facilitate cross-border adoption of its digital yuan to benefit consumers, dealers, bankers and industries across numerous regions.

Focusing on Hong Kong, the special administrative region can play a key role in helping yuan to internationalize, given its competitive advantages as the world’s largest offshore renminbi center and adherence to the “one country, two systems” principle, the cornerstone of the city’s system. According to SWIFT, more than 70 percent of global offshore renminbi payments are processed in Hong Kong.

The e-CNY or digital yuan may be able to boost global wholesale use of the renminbi, and the BRI and RCEP free trade areas can be perfect platforms to do so. While facilitating cross-border adoption of the digital yuan, such economic exchanges will also help any of the other central bank digital currencies in Asia. Moreover, Hong Kong can play a key role in helping the yuan to internationalize, given its role as the world’s largest offshore renminbi center. However, de-dollarization is a trend that seems to be intensifying but it remains difficult to predict to what extent it will accelerate.

To sum up, China is near the final stage of deploying its digital yuan, after which it will be able to focus more on cross-border payments applications. This will have great significance in the years to come, since China is in a perfect position to leverage its digital yuan for cross-border payments, while Hong Kong can also play a key role in the process of internationalizing the yuan.

The author is a fintech advisor and researcher. He holds a Master of Business Administration and a doctorate in Hong Kong real estate law and economics. He has worked as a business analyst for a Hong Kong publicly listed company.

The views do not necessarily reflect those of China Daily.