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China’s CBDC Push Now Seems to Worry US

There are indications that China’s being poised to be the number one major economy to issue a central bank digital currency is now a concern for the US government going by a Bloomberg report which says US officials are eager to know how the digital yuan would be distributed.

Citing anonymous sources familiar with the matter, the report says that though the US administration is currently not planning to take any action to counter the long term threat of the Chinese move, they want to know if the digital yuan can be used to work around US sanctions.

 

Concerns over e-CNY/USD dominance struggle

They also want to know whether the CBDC poses any threat to the dominance of the US dollar in the current global financial system, a fear that’s somewhat based on a concerning feature which enables the easy transfer of the e-CNY across borders without complicated banking transactions.

The digital yuan not requiring a bank to be transferred from one country to the other would allow China, as well as its affected allies, to circumvent sanctions as Chinese banks would maintain access to US-denominated foreign capital while the yuan gradually becomes an alternative to the dollar for international trade. 

With oil prices and the US dollar inevitably linked, a rise in the status of the yuan on a global front and a decline in the reserve currency status of the dollar could affect several industries including oil and gas. Though Bloomberg reports that the ability of the People’s Bank of China (PBoC) to maintain control over transacting parties’ data could make the e-CNY a powerful policy making tool at home, China’s rise with the digital yuan could lead to inflation in the US as well as future budget cuts. 

 

e-CNY from a Chinese view 

Meanwhile, China has added six more regions to its pilot programme for the digital yuan, head of PBoC’s macroprudential policy bureau, Li Bin, said on Monday. Shanghai, Hainan province, Changsha, Xi’an, Qingdao in Shandong province and Dalian in Liaoning province, are joining the CBDC trial which China’s Social Council Information Office (SCIO) says will help advance financial inclusion in the country and benefit their economy.

The SCIO notes that the retail payment infrastructure can be easily accessed as it does not require users to link their bank accounts thus opening up the new currency to benefit China’s unbanked population. It could also be used to lower the costs of financial transactions amongst others, the information office states

For Xu Gang, an associate research fellow with the Institute of World Economic Studies at China Institutes of Contemporary International Relations, the development of the digital yuan is preparing the ground for reshuffling the international monetary system and will inject new impetus into RMB internationalization. China’s decision to internationalize the yuan is not meant to seek financial hegemony in the global economy, Gang writes, but to better protect China’s development interests

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