It was supposed to be the biggest threat to the reserve status of the dollar (China's denial that it has no desire to replace the USD with the digital yuan only confirms it) since the failed experiment that is the "whatever it takes" euro, but instead it is turning out to be one giant yawn.
While many pundits have argued that China's digital yuan would be a "potentially fatal challenge" to American hegemony according to historian Niall Ferguson, Templeton's Hasenstab saying it could undermine the dollar's role as a reserve currency and even Biden's White House studying the potential threats to the US currency, those who’ve actually used the digital yuan in China offer a vastly different response: big shrugs of indifference.
According to Bloomberg which interviewed users of China's digital currency, they showed little interest in switching from mobile payment systems run by Ant Group and Tencent that have already replaced cash in much of the country, with some openly balking the digital yuan - which recall is programmable and comes with an ad hoc expiration date - and which gives authorities access to real-time data on their financial lives.
“I’m not at all excited,” said Patricia Chen, a 36-year-old who works in the telecom industry and was one of the more than 500,000 people in Shenzhen eligible to take part in the trial.
The lukewarm responses of the seven participants in China's great monetary experiment underscores the challenge facing President Xi's government as it lays the groundwork for adoption at home and abroad. And, as Bloomberg notes, even if authorities ultimately convince - or rather force - citizens to embrace the digital yuan, it’s unclear how they can do the same with international consumers and businesses already wary of China’s capital controls, Communist Party-dominated legal system and state surveillance apparatus.
It's also why with the Yuan's share of global payments seemingly capped at around 3% in recent years - in no small part due to China's closed capital account and great monetary firewall - a digital version of the currency is unlikely to boost its share by much more than 1 percentage point, according to Zennon Kapron, managing director of Singapore-based consulting firm Kapronasia.
“The global impact will be very small” barring structural changes to China’s economy and financial system, said Kapron, author of “Chomping at the Bitcoin: The Past, Present and Future of Bitcoin in China.”
Those familiar with China's grand ambitions suspect that Xi has high hopes for international use of the digital yuan as he tries to lessen his country’s reliance on the U.S.-led global financial system. But so far at least, Chinese policy makers have given mixed signals about their ambitions in public.
As Bloomberg reports, Zhu Jun, head of the central bank’s international department said in an article last month that China faces an “important window” to promote global use of yuan as U.S.-China decoupling threatens to spread to finance from trade, technology and investment. She said China “should take advantage of the early progress” in the digital yuan’s development to explore potential areas for internationalization.
There is just one problem: nobody can figure out why they need to use a digital currency which allows authorities to snoop on their every activity, when existing alternatives offer everything the digital yuan can do.
As we have noted previously, China's digital currency project was started in 2014 by then-PBOC chief Zhou Xiaochuan, a longtime proponent of creating a new international reserve currency as an alternate to the dollar.
Zhou saw the e-CNY as one way to fend off potential threats from digital currencies like Bitcoin or Facebook’s Diem (formerly called Libra). Chinese regulators, who banned cryptocurrency exchanges in 2017, have also said the digital yuan will help combat money laundering and increase financial inclusion. And maybe it will - in some universe where they can convince over 1 billion Chinese to use it.
But it's what China really hopes to accomplish with its CBDC that is preventing adoption: the reams of data produced by digital yuan transactions could give China’s central bank valuable real-time insights into the world’s second-largest economy; they might also be used by security services to monitor political dissidents or international businesses that compete with state-owned Chinese enterprises. It could also target any user and any "bill", effectively getting real-time control over any person's digital wealth.
There is another reason why Beijing is rushing to rollout the digital currency: as we reported last month, the "programmable" digital yuan comes with an adjustable expiration date which could - at the flip of a switch - encourage spending during economic downturns, or enable regulators to instantly turn off the e-wallet of anyone who runs afoul of Beijing.
In short, it is the BFF of the world's most draconian surveillance state.
Meanwhile, global adoption of e-CNY would not only make cross-border payments cheaper and faster, it would also help the Communist Party weaken the impact of international sanctions. The PBOC has so far offered few details about how the e-CNY might be used overseas, other than to say it’s conducting cross-border tests with Hong Kong’s de-facto central bank.
Luckily, all these ambitions appear to be falling flat on their face.
Using the digital yuan was easy enough for Vera Lin, a 25-year-old who works at a financial company in Shenzhen. At the same time, she said, incentives for making a permanent shift to e-CNY are lacking given China’s existing digital payment options are reliable and work seamlessly with other app-based services from social media to e-commerce platforms. Well, Vera, when it comes to incentives, China is well-equipped - literally - with just the right amount of firepower to convince anyone which currency "is the right one"... and it won't be shy to use it.
Failing that, however, it will be virtually impossible to get widespread adoption: even discounts of as much as 10% from merchants participating in the digital yuan trial weren’t enough to win Lin over. Platforms operated by companies like Ant routinely offer discounts on everything from ride-hailing services to grocery delivery.
Meanwhile, as Bloomberg notes, it was concerns about privacy - or lack thereof - that were among the biggest turnoffs for Jan Chen, a 33-year-old civil servant. It’s “a little scary” that authorities might be able to trace every payment, she said. In a country where compliance with tax laws is often patchy, some merchants may also be wary of their transactions flowing directly into a government database.
The PBOC has tried to quell those concerns by making the digital yuan free to use for merchants –- which currently pay service fees of around 0.6% for transactions on Alipay and WePay -- and by pledging that most payments will remain anonymous. Not that anyone actually believes that.
So what happens next?
If, or rather when, the digital yuan fails to gain traction over the long term, China’s government will turn to coercion, according to Kapron. It has already started taking steps to assert more control over the data gathered by financial and tech companies including Ant and Tencent. “At the end of the day, I think it’s going to have to be the government saying: ‘You have to use this,’” Kapron said.
In any case, Francis Chan, a senior analyst with Bloomberg Intelligence and fellow BI analyst Sharnie Wong predict the digital yuan will be in use nationwide before the Beijing Olympics in 2022 and comprise 9% of China’s domestic digital payments by 2025. That’s no small change, but still a long way from challenging the dominance of Alipay and WePay, which are estimated to have a combined market share of more than 90%.
But persuading the world to embrace the digital yuan will be even harder. “The e-CNY addresses just one layer of it, the payment infrastructure part,” said Michael Ho, principal of financial services at Oliver Wyman. “But just tacking on this one layer will not solve the entire puzzle.”