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Editor’s blogApril 28 2020

The next big US-China battle

China is pushing ahead with its digital yuan to remove itself from the dollar’s orbit
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Chinese authorities know they face challenging times in the post-Covid 19 world. For a start they will face a slew of US legal actions for compensation on the basis that China did not act quickly enough when the disease first appeared in Wuhan.

The crisis has also made it clear that being too dependent on one country for vital supplies has its shortcomings and supply chains may be reconfigured away from China.

All the more reason why China is accelerating its own plans for self-reliance and key among these is the creation of a digital currency by the central bank using distributed ledger technology. Trials are now underway in Shenzhen, Chengdu, Suzhou and Xiong’an.

Digital Currency/Electronic Payment, as the project is known, will be an alternative to the payments’ infrastructure set up by tech giants Alibaba and Tencent, and could be live before the end of the year. An interesting feature is that payments can be made offline enabling it to be used more easily in rural areas and removing a key roadblock to China’s aim of becoming the first cashless society.

But there is an international dimension too. China’s embrace of a digital currency was spurred on by Facebook’s plan for its own digital currency, the Libra project, with China fearing that this could become a weapon in any US sanctions against the country.

China’s digital currency will help to internationalise the renminbi and make Chinese companies less dependent on the US dollar as a trade currency. In a post-Covid world that will be even more important than before. 

Brian Caplen is the editor of The Banker. Follow him on Twitter @BrianCaplen

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