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Zhou Xiaochuan, the Surprisingly Liberal PBoC Governor That Spearheaded the DCEP

With major pilot projects taking place across the country, the future of the Chinese digital yuan has been the focus of most of the media attention directed towards the country. The country has set its sights on making the digital yuan the go-to currency during the 2022 Beijing Winter Olympics and is pouring an incredible amount of resources into making that happen.

And while many are looking into the digital yuan’s future, few are exploring the history behind China’s efforts to digitize its national currency. The digital yuan is a product of over 6 years of work that gathered expertise from thousands of industry experts.

However, there most likely wouldn’t be a digital yuan if there wasn’t for one man, whose surprisingly liberal, market-oriented approach to regulating China’s financial industry was a perfect match to the burgeoning world of blockchain technology. 

Zhou Xiaochuan is the longest-running chief of China’s national bank, steering the monetary policy in the country for 16 years. Zhou is believed to be one of the largest factors that contributed to China becoming the second-largest economy in the world and is consistently ranked among the most influential global policymakers of his generation.

But, despite his incredible influence on the global economy, very little is known about Zhou. The former governor has followed in the steps of many of his colleagues, deciding to keep his private life hidden from the public eye. 

Nonetheless, his extensive tenure in the Chinese government and the 16 years he spent as the chief of the People’s Bank of China (PBoC) provides enough resources to paint a broad picture of the man that made the digital yuan possible.

Early Life and Foray into Politics

Zhou was born in 1948 in the city of Yixing in the Jiangsu province, the son of Zhou Jiannan, an early member of the Chinese Communist Party and its secret service. His father headed the Electric and Industrial Bureau of the North East district throughout the 1950s, becoming the Vice Minister of the First Department of Machinery Development in 1961. He was also one of the first supporters of Jiang Zemin, who served as the President of China from 1993 to 2003, with some sources claiming he was one of Jiang’s mentors in his early career. 

The onset of the Cultural Revolution saw the elder Zhou persecuted by the Communist Party. During the revolution, Zhou Xiaochuan joined the Production and Construction Corps in Heilongjiang but left to attend the Beijing Institute of Chemical Technology as a selected student in 1972. After graduating in 1976, he was assigned to the Beijing Research Center of Automation as an engineer studying large automation systems. 

Then, in 1986 with a fresh Ph.D. in Science from Tsinghua University, Zhou began working in the State Council of the People’s Republic of China. This marked the beginning of his career in politics, having spent the next 32 years working on economic reform in the country. 

While he made significant contributions to politics in the 1980s, he made the biggest impact following the Tiananmen Square protests in 1989. 

At the time, China was divided on whether to pursue the model of political reforms adopted by Russia after the fall of the Soviet Union. Most reformers within the party, including Zhao Ziyang, the General Secretary, supported the Russian model, but Zhou pushed for a model that maintained the Communist Party’s political control while allowing state-owned enterprises to be subjected to market reforms.

While hard to say if Zhou anticipated that the Russian model would lead to the creation of oligarchs, it’s clear that the push for more state control over the market would be the defining paradigm of his later tenure at the PBoC. 

The model he opted for created a unique system within China—state-run enterprises were structured and governed like western corporations and listed on the stock market.

This turned out to be such a successful system that Zhou’s attempt to reduce state-ownership in the stock market in 2001 resulted in a freefall that had the potential to completely crash the market. While he quickly abandoned the plan to avoid further tanking the market, he spent the following years emphasizing the role of market mechanisms and working to introduce measures that protect retail investors. 

A Pioneer of Central Bank Digital Currencies

Zhou went on to become the 11th Governor of the People’s Bank of China in 2002 and spent the next 16 years holding the position. Despite retiring in 2018, Zhou has been working as the Vice Chairman of the Boao Forum for Asia, a non-profit organization hosting conferences for world leaders. 

He was also one of the first state leaders that recognized the potential benefits and dangers of cryptocurrencies. Zhou reportedly saw bitcoin’s anonymity as problematic, as it allows citizens to transact in a way that was essentially impossible to trace. His work regulating the stock market in the China Securities Regulatory Commission (CSRC) between 2000 and 2002 clearly influenced his views on cryptocurrencies, as he spent most of his time there cracking down on corruption in capital markets. 

In 2013, the PBoC banned Chinese institutions from processing all bitcoin-related transactions, effectively stomping out the growing crypto industry in the country. However, Zhou didn’t overlook the immense potential cryptocurrencies had and spearheaded the creation of a task force that would study explore a national digital currency. 

His work on establishing solid foundations for a digital yuan was soon recognized by other policymakers in China and the digital yuan initiative was written into China’s 13th Five Year Plan in 2016. At the time, the country was in the process of tightening its capital controls as it was facing increased pressure from international institutions to set up a floating interest rate on the renminbi. When paired with the shrinking foreign reserves, all of this propelled the development of the digital yuan, which was seen both by Zhou and the rest of the policymakers in China as the most promising solution. 

The 2017 ban on fiat-to-crypto transactions further cemented this plan, as the country announced the creation of the Digital Currency Research Institute in Shenzhen the same year.

Zhou’s last two years as the governor of the People’s Bank of China saw little mention of the digital yuan initiative. In hindsight, it’s clear that this was a calculated effort to keep the development of the currency under wraps until Zhou’s successor Yi Gang took control of the bank.

Just as Yi Gang was appointed governor, Facebook announced Libra, its own digital currency initiative that had the potential to offset China’s ambitious plans for the digital yuan. This caused the digital yuan initiative to pick up the pace of development—it took less than 12 months from Libra’s announcement before China began running the first pilot projects involving the digital yuan. 

And now, with over $2 million worth of the digital yuan distributed in various tests of the new payment system, it’s safe to say that Zhou’s efforts to create a state-run free-market hybrid economic system created the perfect foundation for the launch of the country’s digital national currency. 

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