China's Digital Silk Road
China's digital yuan has experienced remarkable growth since its inception in 2014. By June 2024, transactions using the digital yuan soared to CNY 7tn (USD 982bn), quadrupling from the previous year's figures, according to Lu Lei, Deputy Governor of the People's Bank of China (PBoC).
The PBoC's decade-long research and four-year pilot program, spanning 17 provinces and municipalities, have validated the digital yuan's feasibility across various sectors, including retail, dining, and wage payments. Operating on a unique "two-tier structure," the digital yuan balances central bank oversight with operational institution involvement, enhancing financial inclusivity and payment efficiency.
Internationally, China is collaborating with Hong Kong, Thailand, and the UAE on mBridge, a cross-border digital currency project led by the Bank for International Settlements (BIS). This initiative aims to revolutionise global payment systems, as demonstrated by the recent successful international remittance between China's eCNY and the UAE's digital dirham via the National Bank of Ras Al Khaimah.
Despite these advancements, the digital yuan faces significant hurdles in challenging the US dollar's global dominance. The dollar, used in 88% of foreign exchange trades and comprising 60% of global reserves, derives its strength from America's deep capital markets and trusted government securities. For the yuan to compete, China would need to implement substantial financial liberalisation, including removing capital controls and increasing economic transparency – steps Beijing appears hesitant to take.
However, the dollar's true vulnerabilities lie not in external challengers but in potential US policy missteps, such as overusing financial sanctions or mishandling debt obligations. These actions could gradually erode global trust in the currency's stability.
As China refines its digital currency, the global financial community watches with keen interest. According to the BIS, 24 central banks are looking to launch their own versions of digital currencies by 2030.
While the digital yuan represents significant technological progress, its long-term impact on international monetary systems and economic relationships remains uncertain. Nevertheless, the PBoC's commitment to steady development suggests that the digital yuan will continue to play an increasingly important role in shaping the future of global finance and cross-border transactions.
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