A digital Chinese currency red packet is seen on a mobile phone in an arranged photograph as Chengdu city starts to distribute 200,000 E-CNY ‘red packets’ worth 40 million yuan on February 24, 2021 in Yichang, Hubei Province of China.
VCG | Visual China Group | Getty Images
China’s absolute control over its digital currency will drive more demand for cryptocurrency, according to Boris Schlossberg, managing director of FX Strategy for BK Asset Management.
Such “absolute power” over the wealth and income of its citizens is the “primary driver” for China to develop its digital currency,” he said in a note on Wednesday.
“The digital yuan is both programmable and trackable giving the Chinese government enormous control over the economy. Not only will Chinese policymakers know every consumer choice made in the economy, but they could also directly affect spending behavior by making the currency expirable by a certain date,” he wrote.
But it may put off users who prefer the anonymity of cryptocurrencies like bitcoin, which is touted as being private and encrypted.
“Yet it is precisely this policy objective that will drive demand for crypto in the future,” said Schlossberg. “With many Chinese entrepreneurs and consumers clearly aware of the government’s intention to exert absolute authority over personal assets, the trend of converting at least part of one’s wealth into crypto assets will continue despite crypto’s inherent volatility.”
As China promotes its digital currency, it is also bringing in uncertainties through the process, says the CEO of BNP Paribas’ China business.
The Chinese central bank wants to introduce the digital yuan “because they want to make the domestic financial institution much more efficient,” said CG Lai told CNBC’s “Street Signs Asia” on Wednesday.
“But on the other hand, the digital currency might introduce uncertainties (to) the financial institution,” he added.
China’s central bank has been working on the digital yuan, the so-called the Central Bank digital currency (CBDC), that aims to replace some cash in circulation. It’s effectively a way for the central bank to digitize bank notes and coins in circulation.
“Nobody is quite certain about how this … execution would be like, but on the cross-border side there’s obvious benefits for the Chinese in trying to promote the cryptocurrency,” Lai said.
China is the world’s biggest trading partner — and trades with 134 countries in the world, he pointed out.
“Worldwide, it is very legitimate, and also good thinking for the Chinese government to want to promote the digital currency, if that can be used in the cross-border payments,” Lai said.
Beijing also has ambitions to internationalize its currency and experts have said that the digital yuan is one way to do that.
The Chinese yuan is now the sixth most used currency in international payments, and is used to settle about 20% of China’s trade, according to data from Singapore bank DBS.
The share of the yuan in global reserves has also crept up — from 1% in 2016 to around 2% currently, data from the International Monetary Fund shows.
The U.S. dollar is still the world’s reserve currency by a large margin. Around 50% of global trade contracts are still quoted in the U.S. dollar, despite the country accounting for only about 12% of global trade, according to an IMF study.
These involve the local government handing out a certain amount of yuan via a lottery. Users usually have to download a separate app to receive the currency. JD.com, one of China’s biggest e-commerce players, was involved in the trial and allowed customers to purchase items with the digital yuan.
— CNBC’s Arjun Kharpal contributed to the report.