China's Digital Currency Development - Implications for RMB Internationalization

- Houston Scott


After reading several academic reports from the Foundation for Defense of Democracies, specifically Below the Belt and Road, I believe more research should be done by the F.D.D., among other think tanks, to analyze the development and trajectory of China’s Central Bank Digital Currency (CBDC).

A CBDC is a, “central bank issued-digital money denominated in the national unit of account, and it represents a liability of the central bank.”[1] This electronic form of a digital fiat currency owes its existence to the development of cryptocurrency, but is different in that, “cryptocurrencies (like Bitcoin, Ethereum or Tether) are digital assets that function as a medium of exchange and exist only on digital ledgers. They exist independently of governments, and they trade on exchanges that convert their value into local currencies” (Turrin, Cashless, 106). Regulation and accountability of CBDC falls upon central banks, not private financial institutions.

In the near future, China is scheduled to launch a nationwide digital currency, known as digital yuan or e-CNY. This follows extensive tests of the coming launch, in which citizens conducted transactions involving millions of digital yuan in controlled rollout trials.[2] In 2020, over 85% of China’s population (approximately 765,000,000 people) used mobile payment methods, typically conducted over the mega-apps Alipay and WeChat pay.[3] However, commerce transacted through these platforms are not currently done through CBDC. Alipay and WeChat pay, “move account ‘balances’ through the existing payment networks digitally” (Turrin, Cashless, 106). A digital yuan has the potential to revolutionize e-commerce by allowing individuals and businesses to pay over the same online platforms, but sidestep a third-party intermediary (i.e., a bank shifting digital account balances from consumer to supplier).

This writing sample’s research will include numerous sources, but the topic was ultimately inspired by Richard Turrin, an awarding winning author and executive who previously headed numerous financial technology (fintech) teams at I.B.M. Turrin’s recently published book, Cashless: China’s Digital Currency Revolution,[4] greatly influenced the subject matter of this writing sample.


Contrary to claims from Western journalists, media outlets and political pundits that China is unable to technologically innovate, China’s coming nationwide adoption of CBDC is a revolutionary advancement in conducting personal or business transactions and international trade. The necessary tech advances China made for CBDC were mostly developed through private firms, specifically the Alibaba group (responsible for Alipay and affiliate Ant Financial) and Tencent (developer of WeChat pay). The groundbreaking regulations for these advances occurred because, “In 2013-14, the tech companies Alibaba, Baidu and WeChat were explicitly granted online private banking licenses, even though their activities would potentially overlap with those of the state banks” (Turrin, Cashless, 66). The willingness of the Chinese Communist Party (CCP) and People’s Bank of China (PBOC) to liberalize regulation of the private tech sector via new legislation in the twelfth five-year plan allowed tech companies to access banking licenses, thus explaining the rapid advancement of fintech in China.

This should not suggest China is innocent of prior intellectual property theft, nor does it indicate that China is incapable of conducting future cyber-espionage. In the Survey of Chinese-Linked Espionage in the United States Since 2000, the Center for Strategic and International Studies found 152 incidents of Chinese backed espionage against the United States. Of which, 74% of the reported cases occurred in the decade 2010 – 2020 with 45% of the perpetrating actors serving as Chinese military or government employees and 30% as private Chinese citizens.[5] The capacity for China to steal private or secret American information is a present threat.

However, global innovation and consumption for fintech has largely been led by China. The consultancy Ernst and Young conducted a Global Fintech Adoption Index which grades countries on their level of fintech acceptance by consumers and small to medium sized enterprises. China tied with India as the global leader with an 87% adoption rate, while the U.S. ranked 24th with a 46% rate.[6] China’s dominance, relative to India, is further realized when comparing total mobile payment volume. In 2018, India’s total mobile transactions accounted for an estimated $200 billion. This is dwarfed by China’s $42 trillion mobile payment volume. For comparison, U.S. mobile payments in 2018 logged only $120 billion (Turrin, Cashless, 17). Clearly, China is capable of fintech innovation without need of intellectual property theft.

It is imperative U.S. think tanks monitor the regional spread of Chinese fintech platforms (notably throughout Southeast Asia and Africa – areas of high B.R.I. investment). Furthermore, China’s adoption of a nationwide CBDC will promote internationalization of the RMB, and thus challenge the U.S. dollar in global currency supremacy. Appropriate responses and policy must be carefully discussed and implemented by the Federal Reserve and other institutions. Finally, big tech firms and the U.S. government must observe, familiarize and improve upon China’s digital currency and mobile payment platforms. Financial innovation is the future, and already, the United States is playing catch-up.


The scope and impact of China’s CBDC, also known as a Digital Currency/ Electronic Payment (DC/EP) system, will actualize through e-Yuan issued by the PBOC and be transacted over the fintech platforms Alipay and WeChat pay among others. This is too broad a topic for the writing sample to fully cover. Instead, this report will focus on the recent development DC/EP has had in trade conducted in the Special Administrative Regions (SAR) Hong Kong and Macau and discuss how DC/EP could serve as a catalyst to increase international trade conducted in RMB, specifically in countries affiliated with China’s BRI.


In August 2020, the Pearl River Delta cities Guangdong, Shenzhen and the Special Administrative Regions Hong Kong and Macau became test sites for what will become China’s CBDC. This area contributed roughly 12% of China’s GDP in 2017, totaling around $1.5 trillion. The Pearl River Delta’s massive economic influence, in both domestic and international markets, presents a massive opportunity for Beijing to launch DC/EP systems throughout the world while simultaneously increasing the global adoption of RMB thus decreasing international dependence of the U.S. dollar.

The IMF reported in Q2 of 2020 that the U.S. Dollar accounted for over 60% of Global Central Bank Reserves, while the RMB compromised a mere 2%.[7] The Chinese government has yet to officially announce their goal of decreasing the dollar’s influence, but the magazine China Finance, published by the PBOC, stated, “China needs and has the ability to build a new payment system network to break the monopoly of the U.S. dollar, and a legitimate digital currency will be an important tool for the internationalization of the yuan.”[8] Clearly, China’s CBDC will act as a pawn in a much larger geopolitical game that seeks to disrupt currencies in the international economic order by increasing global adoption of RMB. Although the official launch date of China’s DC/EP has yet to be released, one of China’s early moves in their endeavor is unifying the Pearl River Delta via blockchain-based financial systems.

Blockchain is the foundational technology for any digital currency, including China’s. As of July 2020, numerous Chinese banks in the Pearl River Delta region traded over $100 billion in various blockchain platforms (Turrin, Cashless, 196-197). Being SAR’s, Hong Kong and Macau operate under separate currencies, taxes, customs, and financial controls than mainland China. Trade within this region is international in practice. Blockchain platforms, which will eventually give rise to standard DC/EP, are seen as the solution to integrating these economic areas.

Recent research from the PBOC found that Pearl River Delta’s Blockchain Finance platforms reduced the time required to process small and medium sized enterprises’ (SME) trade financing applications to twenty minutes from a previous ten days. Furthermore, after implementing blockchain, the cost of SME financing decreased to 6% from previous rates of 8%. The developments from this blockchain platform impressed the PBOC so much that, “they intend to connect more countries and international organizations to it to create a ‘global trade finance highway’” (Turrin, Cashless, 198). This coincides with the signing of the Regional Comprehensive Economic Partnership (RCEP) that seeks to reduce tariffs and boost market access. The RCEP is composed of 14 Asian nations, including China.

The Belt and Road Initiative (BRI) is China’s, “signature foreign policy undertaking and the world’s largest infrastructure program”.[9] Although the BRI’s main stated goals focus on infrastructure investment, improving China and neighboring regions’ economic development and spreading Chinese telecom and health technology throughout the developing world, the BRI’s foreign policy initiatives, “remain largely opaque”.9 Thus, U.S. policymakers must infer that China plans to utilize the BRI to advance internationalization of the RMB.

In 2016, only 14% of total trade conducted through the BRI was transacted in RMB – most of the trade was still denominated in U.S. dollars (Turrin, Cashless, 204). However, data from the Society for Worldwide Interbank Financial Telecommunication (SWIFT) indicates that the BRI is acting as an enabler for RMB internationalization.

According to a SWIFT report, “the number of branches and subsidiaries of Chinese banks connected to SWIFT in BRI countries increased by 31% between 2014 and 2018. Many of them were opened to specifically serve State-Owned Enterprises and Chinese corporations involved in BRI infrastructure projects”.[10] Furthermore, the average RMB payment increase for BRI countries to China, typically along the Silk Road Economic Belt, for this period was 95%. Most notably, RMB usage among China’s top BRI trading partners increased by an average 144%.10

Several developments regarding this statistic should be noted during the period 2016 - 2019: 1) total payments in RMB from China to Africa increased by 53% and total RMB payments from Africa to China increased by 123%, 2) Singapore saw payment traffic with China increase by 231% for all currencies, 3) the total Asian Pacific region saw a 27% increase of financial institutions (693 to 881 institutions) using RMB for payments with Hong Kong and China. Clearly the RMB usage is advancing rapidly through the BRI – this process will only expediate with the adoption of Chinese DC/EP.

Recently, experts have speculated future RMB market valuations in BRI countries based upon current trends, and the expected influence of DC/EP. According to Richard Turrin, assuming the RMB share of BRI trade increases to 60%, “in ten years, the total RMB market would be valued at U.S. $1.37 trillion” (Turrin, Cashless, 205). Turrin then estimates that of all RMB usage, 60% will be conducted via DC/EP. If this prediction holds true, the DC/EP market in BRI countries would generate a market of $0.82 trillion. While these estimates are purely speculative, they suggest that DC/EP could become an important factor in the rising global adoption of RMB, especially in the wake of COVID-19 which has spurred a decline in liquid cash usage. [1] Iwamoto, Kentaro. "China's New Digital Yuan Tests Hasten Asia e-Currency Race." Nikkei Asia. [2] Kharpal, Arjun. "China Has Given Away Millions in Digital Yuan Trials. This Is How It Works." CNBC. [3] "Online Payments Transactions Processed by Chinese Banks Rise 37.14$ YoY in 2019, Mobile Payments up 67.57%." China Banking News. [4] Turrin, Richard. Cashless: China's Digital Currency Revolution. Authority Publishing, 2021. [5] Survey of Chinese Linked Espionage in the United States since 2000. Center for Strategic and International Studies. [6] Global FinTech Adoption Index. Ernst and Young. [7] Global Central Bank Reserves. IMF. [8] "Direct Banking the Necessary Path for Chinese Finance." China Finance. [9] China's Belt and Road Implications for the United States. Council on Foreign Relations. [10] RMB Tracker; Beyond Borders: China Opens up to the World. SWIFT.