Digital Yuan More About Data, China’s Financial System Weak to Displace Dollar
China’s international ambition for the yuan is one of the headlines of a recent panel discussion put together by the Atlantic Council where the digital yuan’s planned use is discussed as well as its possible rollout being framed as a China vs. US conversation.
For Yaya Fanusie, a Senior Fellow at the Center for a New American Security, what is particularly new about the digital yuan is its enabling digital transactions that are running or directed by a new government infrastructure – the People’s Bank of China (PBoC). He believes the digital currency’s eventual rollout would be more about data than money as China has been looking towards a more data-based economy for some time.
“I think the key theme here is that China has wanted to – for the longest time going almost on a decade here – wanted to develop a government-run, government-managed infrastructure to sort of wrestle control away from private companies that sort of possess financial transactions data today,” Fanusie said during the online discussion.
“A few years ago, the Chinese government created a 3-year fin-tech development plan. The key there is that the government aims for the economy to be driven by data. So if you look at the digital currency in the context of ‘how does China want to drive its economy?’, it means big data analysis, it means the government exerting more control and having more access to data. It also means that not only is commerce run by data but also even government operations, government applications.”
Another panelist, Mark Sobel, who is the US Chair at the Official Monetary and Financial Institutions Forum, notes that those arguing that a digital yuan would cause the currency’s global role to surge to the point of challenging the US dollar seems to view the digitalization effort as revolutionary.
“But the truth is, a large global trade and capital flow already predominantly take place in a digital form,” he said. “So digitalizing a central bank currency is not a game-changer whatever the merit of the improved payment systems may be.”
The US Treasury veteran argued that the dollar wasn’t ordained as the world’s currency by an imposition but chosen by the market not just as a reflection of America’s post second world war hegemony its economy’s large size and dynamism, its unparalleled liquidity depth and strength of its financial system in the capital markets.
He adds that the choice reflects the US’s robust institutions and strong protection for property rights citing the Federal Reserve as an independent central bank and the US treasury being the world’s most valued and risk-free assets. It also reflects the openness of the US economy hence the United States has been willing to let the dollar flow and generally to absorb imports from the rest of the world.
On the other hand, he debunked the claim that the yuan will displace the US dollar saying the global yuan role will remain modest for the foreseeable future.
“China’s financial system is very weak. The banks are stuffed with non-performing loans; (the) capital market development is entrenched but it has a long way to go,” Sobel said. “The RMB is inconvertible; there are copious capital account restrictions which limit openness; contract enforcement can be arbitrary; accounting and auditing standards appear lax. China will be weary of letting the RMB freely flow…I would say that the People’s Bank of China has extremely talented staff but again the PBoC is not independent. Digitalizing the RMB changes none of these.”