Introduction to China’s Digital Currency
China has been working to expand the use of its digital currency, the yuan, also known as the renminbi, to reflect its status as the world’s second-largest economy. The goal is to challenge the dominance of the US dollar in international trade and finance. However, there are obstacles to overcome, including restrictions on access to Chinese financial markets and limits on the convertibility of the yuan.
What are Stablecoins?
Stablecoins are digital currencies whose value is linked to a specific currency, such as the US dollar. They can be used as a substitute in situations where currency transactions might be difficult or costly. Stablecoins are different from cryptocurrencies like Bitcoin, as their primary purpose is to be a means of payment, not an investment. Dollar stablecoins are typically bought and sold for $1 each and are based on a reserve equal to their value.
China’s Digital Yuan
China launched its own digital yuan, the e-CNY, on a trial basis in 2019. The e-CNY is issued by the central bank and has been used in various cities, including for paying wages to civil servants. As of July 2024, there were 7.3 trillion yuan worth of transactions using the currency in areas where it is being used on a trial basis. China has also been promoting the use of the e-CNY in Africa, as it expands its business dealings on the continent.
Regulations and Challenges
While the e-CNY is not a stablecoin, experts say that regulations are needed to safely manage the use of stablecoins and ensure they can be used smoothly with bank accounts and payment systems. Hong Kong, a former British colony with its own financial markets and currency, has enacted a stablecoin law that took effect on August 1. The law requires that a stablecoin linked to the Hong Kong dollar must be equal to the Hong Kong dollar reserves for that digital currency.
Global Use of the Yuan
China’s currency is not freely convertible in world financial markets, and its stringent controls on foreign exchange are the biggest hindrance to making the yuan a global currency. According to the Society for Worldwide Interbank Financial Telecommunication, the yuan was the sixth most active currency for global payments by value, with a share of 2.88% as of June. The US dollar’s share as a global payment currency was over 47%, followed by the euro, the British pound, the Canadian dollar, and the Japanese yen.
Conclusion
In conclusion, China is working to expand the use of its digital currency, the yuan, to challenge the dominance of the US dollar in international trade and finance. While there are obstacles to overcome, including restrictions on access to Chinese financial markets and limits on the convertibility of the yuan, the country is making progress. The introduction of stablecoin regulations in Hong Kong and the promotion of the e-CNY in Africa are steps towards increasing the global use of the yuan. As the world’s second-largest economy, China’s efforts to promote its digital currency are worth watching, and it will be interesting to see how the global financial landscape evolves in the coming years.
