China’s Digital Currency

China’s central bank is lining up state and private partners for the launch of the much-hyped “Digital Yuan.”

The “People’s Bank of China” (PBoC) has integrated Tencent and Alibaba, specifically, their “WeChat Pay” and “AliPay” services as well as their newly established WeBank and MYBank, into its beta digital yuan system being trialed in cities from Suzhou to Shenzhen.

The move is an obvious bid to dovetail the pair’s technological capabilities and ubiquitous penetration with Beijing’s aim to popularize the “e-renminbi.”

The two tech juggernauts are believed to have every incentive to align themselves with the PBoC’s drive to amalgamate third-party mobile and online payment platforms with the nascent digital red back and its ecosystem.

Still, detractors say the pair will have little recourse if their duopoly is debased when the e-RMB gains currency among the masses. The latest inclusion, confirmed in leaked snapshots of the e-RMB wallet and user interfaces, has thus strengthened Tencent and Alibaba’s prospects.

Some say it is also a watchdogs’ tick in the conciliatory column after Beijing’s clampdown since the fourth quarter of 2020, including scuppering Ant Group’s blockbuster IPO in Shanghai and Hong Kong. This taught Alibaba and the like that despite their rising fortunes and power, Beijing calls the shots.

The two will actively put money on the e-RMB trial after being brought into the fold and guaranteed roles, when initially only state-owned lenders such as Agricultural Bank of China and China Construction Bank were included in the first testing partners.

In return, “WeChat Pay” and “Ali Pay” will soon add e-RMB wallets on to their platforms to form the much-needed synergy for a wider and quicker digital currency roll-out, on the strength of their combined market share of almost 95% of China’s cashless payments in 2020, according to Shanghai-based market consultancy iResearch.

A participant of the e-RMB trials shows a user’s interface displaying the digital currency. Photo: Xinhua

PBoC officials, meanwhile, have also sought to refute talk that the central bank will ultimately compete against Tencent or Alibaba. Mu Changchun, director of PBoC’s Digital Currency Research Institute, told an internal symposium in October that the e-RMB would never pit the bank against tech firms and their existing payment channels and that the drive was never a solitary undertaking by the PBoC.

The text of Mu’s speech given to the closed-door discussion and viewed by Asia Times noted that WeChat Pay and AliPay belonged to “indispensable financial infrastructure” and they were in fact virtual wallets while the e-RMB, with its same legal tender status as the red back paper money and coins, would become the money in these wallets.

“In current electronic payment scenarios, money paid via WeChat Pay or AliPay is indeed deposits from commercial banks as users have to link their savings accounts to the two platforms to use their services,” said Mu, who also sits on the central bank’s governing board.

With the launch of the digital yuan, these platforms can continue to operate and these virtual wallets will also contain the e-RMB issued by the PBoC, alongside deposits from commercial banks.

“We will guarantee that the e-RMB can buy whatever you buy with your banknotes or payment tools and no merchant can reject the digital currency.” 

“There is no such thing as competition because both WeChat Pay and AliPay, together with the banks affiliated with Tencent and Alibaba, have been integrated and they are all service providers of the e-RMB system.”

Other than a smartphone-based roll-out of the digital red back, the PBoC is also exploring ways of issuing physical mediums, like a card that can display balance and QR codes for transactions to serve the needs of senior citizens. Photo: Xinhua.

Mu put the focus on the rivalry between government legal tenders and the decentralized and usually unregulated cryptocurrencies issued by tech and private firms. He also highlighted the imperative to defend a country’s “currency sovereignty” and the right to issue money and supervise its use, stressing the pressing need to digitize the RMB in the face of the new challenges.

“Mu’s remarks are aimed at mollifying Tencent and Alibaba as their platforms are called important elements of China’s financial infrastructure and won’t be shut out of the e-RMB trials and its impending launch,” said a professor of economics with the Shanghai-based Fudan University, who requested not to be named.

“But Mu’s words are also a tacit warning that no tech firms in China should jump on the cryptocurrency bandwagon to undermine the PBoC’s authority.”

The professor said there had been rumors that Tencent’s Pony Ma and Alibaba’s Jack Ma once through of experimenting with de-facto digital assets for transactions on their platforms.

Under the PBoC’s regulatory regime governing RMB issue and circulation, only licensed commercial banks could convert paper money into the e-RMB but it remained to be seen if these online banks set up by tech firms would also be allowed to do so.

Liu Xia, CEO and founder of “Cloud Hands Trading Group”, a London and Beijing-based business school and fintech incubator, said that users could expect minimal hassle when using the e-RMB, nor would there be any differences between using the digital currency and WeChat Pay or AliPay.

Launching the digital currency is meant to safeguard Beijing’s currency sovereignty amid challenges from unregulated cryptocurrencies issued by private firms, the PBoC says.

Yet she said with its wider roll-out and the public’s enhanced understanding of the e-RMB, some may feel that leaving their digital money on the PBoC’s centralized platform or those operated by the “big four” state-owned banks would be safer than storing the money in WeChat Pay or AliPay.

“Whether e-RMB is fundamentally safer depends on where you park the money,” wrote Liu in her column in the Economic Observer newspaper. “If it is stored in third-party payment apps then theoretically you may still suffer loses when their operators go bankrupt, but the PBoC’s platform, by comparison, looks safer and foolproof to some people as the central bank represents the nation.” 

Tencent and Alibaba may still lose some users and transactions and the pair will have to find ways to retain customers when people have more platforms to store and use the e-RMB.

The PBoC is offering its own platform with state backing and its user experience will just be as fluid as any existing third-party tools as seen in ongoing trials, said Liu.

PBoC deputy governor Fan Yifei revealed in October that the central bank’s platform had already processed 3.13 million e-RMB transactions worth 1.1 billion yuan during the first three quarters of 2020. The trials across Beijing, Suzhou, Shenzhen and Chengdu involved 113,300 personal e-RMB wallets.

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