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April 7, 2022

Seizing the means of consumption: China and the digital yuan

It is often said that ‘money can’t buy happiness’, but for Chinese President Xi Jinping, money, in the form of the new digital yuan, can buy a host of desires, including greater social control, the curtailment of Big Tech, and the undermining of the US dollar. These are all objectives, which, if met, would certainly make senior members of the Chinese Communist Party very happy indeed.

After becoming available for the first time for foreign visitors at the 2022 Winter Olympics, the digital yuan—China’s Central Bank Digital Currency (CBDC)—received a brief moment of international media attention. However, the digital yuan has been piloted for Chinese citizens since 2020 and its long-term implications are being intensely studied in central banks around the world.

Digital yuan puts China ahead of the US

In recent years, China has been a leading adopter of mobile payment systems. Data collected in August 2021 from GlobalData’s Banking Intelligence Center shows that 79.2% of Chinese citizens have used a mobile wallet in the last 12 months. China’s progress on its digital yuan is years ahead of the US’s progress on creating a Central Bank Digital Currency (CBDC). The rise of China’s interest in creating its own CBDC is parallel with the rise in cryptocurrencies in the Western world. The chaotic, unstable, but libertarian nature of crypto stands opposite to China’s centralized, government-backed digital yuan. As such, the aims and the benefits of each currency are worlds apart.

Seizing the means of consumption

First of all, with every transaction being digital (and crucially, using a centralized ledger), the digital yuan allows for money to be tracked with greater ease—handing power back to the government and away from fintech firms such as Ant Group (Alipay) and Tencent (WeChat Pay)—which is in tune with the government’s latest crackdown on tech companies.

Taking credit: the CCP wants digital payment data

The importance of data—specifically financial data—also underpins the CCP’s interest in the digital yuan. Consumer data harvested from Ant Group’s Alipay (a mobile payment platform used by over 700 million monthly users) is one of the company’s biggest assets. It has allowed the company to enter the banking space, and as of June 2020, Ant Group has more outstanding loans than any Chinese bank. Furthermore, Ant Group has used its data to profit via selling information on future debtors to state-owned banks.

However, Ant Group has historically been evasive when it comes to handing over control of its most valuable assets to the central government. Creating the digital yuan will centralize data in the hands of the CCP while simultaneously reducing the power of Chinese fintechs compared to the government. After it is officially launched, legislation will very likely be introduced to incentivize the usage of the digital yuan over its private-sector rivals, to reduce their market share of the mobile payments theme.

Digital yuan dancing with the dollar

The digital yuan will first take off within China but will likely be used for international trading in the long term, with the aim of promoting China’s currency use globally. The digital yuan, in the distant future, could usurp the dollar as the international reserve currency. This may be a long way off, but China’s intention to undermine the dollar is evident. Promoting the use of the digital yuan internationally would, if achieved, dramatically reduce the impact of any future US sanctions that could be applied if China pursued a foreign policy move the US disapproved of.

In the wake of the current sanctions on Russia, a move to promote the digital yuan internationally in the long term must look increasingly enticing to top Chinese policymakers. China’s digital yuan encompasses two themes that are consistent across policies made by the Chinese Communist Party. First, that no company or individual will be allowed to compete with the state. And secondly, that data will be centralized and utilized to assert further social control and develop more effective public policy.

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