Intelligence

A Digital Yuan?

Milton Ezrati

Chief Economist

A few weeks ago, media outlets – especially tech-oriented organs – became agitated about an announcement from China’s central bank, the People’s Bank of China (PBOC).  Its spokespeople told the world that the PBOC intends to launch the world’s first central-bank-directed digital currency, CBDC. Many western commentators in response followed the lead of tech CEO Jeremy Allaire, who described the planned currency move as a breakthrough and speculated that the CBDC would “internationalize” the yuan and perhaps allow it to gain global dominance over the dollar.  This is all hype. China has done something considerably less momentous with the CBDC than popular descriptions imply. The digital yuan embodies little new and appears to aim less at unseating the dollar as the world’s premier international currency than in securing domestic control.

First on the list of things that are not new is the structure of this digital unit.  Unlike bitcoin and other cyber currencies, China’s CBDC will be tied to the yuan. Spokespeople for the new unit claim, correctly, that it will make this digital currency more stable than others.  It will also make it exactly like other national currencies. The man in charge of the project, Central Bank Deputy Director Mu Changchun, also described a two-tiered system for the distribution of the digital unit.  The central bank, he explained, would issue the currency but it would channel the unit to the public through licensed commercial banks and what he described as “operating institutions.” Rather than something new, this is precisely how every country in the world channels money and liquidity into their financial systems.  The Federal Reserve, the European Central Bank, the Banks of England and Japan, and all others issue reserves and license commercial banks to decimate money to the public as a strict multiple of those reserves. All monies are tied to central bank reserves, just as Deputy Director Mu proudly claimed for the CBDC.

If the PBOC’s system for distributing the digital unit is conventional in the extreme, neither is its digital nature especially revolutionary.  Most currencies in the world have long been mostly digital for decades. Reserves at all major central banks are digital as are people’s accounts at commercial banks and other financial institutions.  Account holders have the option of using paper checks and paper money, but debit cards have long made transactions entirely digital, everywhere in the world, increasingly through electronic wallets at which the PBOC aims with its CBDC.  

Nor do the claims – or perhaps it is fears – of the imminent “internationalization” of the yuan seem realistic, on the basis of the CBDC or otherwise.  Jeremy Allaire and the columnists who echo him point out that a digital unit could transact business anywhere in the world and so presumably steal a march on other, less digital currencies.  Of course, the capabilities of the technology are irrefutable and have been for years, as most major currencies have been digital for years. Any digitized unit could be used for transactions anywhere in the world, at least as long as there is an Internet connection.  Even though the dollar, the euro, sterling, the yen, are not wholly digital they could have accomplished such an “internationalization” decades ago within the long-established system, if, that is, it were a matter of technology only. But technology is far from the whole story.  Law, convention, and convenience matter too.

Several countries, including the United States, have laws about what currency can be used to settle transactions domestically.  Legislation allows people to barter and settle transactions in bitcoin and the like, but not in a foreign currency. Most wholesalers and retailers in this country and nations with similar laws would resist any push to settle in any currency but their own.  Even where such laws do not interfere, producers and merchants across the globe will hesitate to adopt the yuan (or any other foreign currency) however digitally convenient it is. They, after all, have recurring liabilities in their local currency – rent, payroll, inventory costs, that sort of thing.  Even if they were bullied into yuan-based transactions, they would, if they were prudent, quickly convert the yuan into local currency, effectively doing the conversion for their customer after the sale rather that the customary practice of asking the buyer to convert currency before the sale.

Since China’s leadership in Beijing knows all this, it clearly has purposes other than global dominance for the CBDC.  History says that its objective is domestic control. The Communist Party objects to Chinese people and businesses doing any transaction over which it lacks control or, at the very least, oversight.  It has banned bitcoin and similar cyber currencies because they would thwart that desire for complete oversight and control. Paper currency, however, remains a problem for the authorities in this regard.  It enables people and businesses to make anonymous transactions and also allows them to move money out of the country without the knowledge of the PBOC or the Communist Party. No doubt China’s leadership believes (hopes?) that the CBDC will tempt the Chinese to give up on paper currency and go digital.  Once that is done, the authorities will indeed have complete control and oversight. It is this rather mundane but significant police matter, more than hopes of global dominance that lies behind the CBDC.

Meanwhile, businesses in the West continue to digitize their practices, a subject that next month’s paper will highlight with a discussion for new ventures by Google and Facebook (no, not Libra).

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