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New Upcoming Threat From China: China's Digital Currency

Be a matter of COVID-19, US-China trade war, Hong Kong movement, or recent standoff between India and China on LOAC, The People's Republic of China usually be in news on the global front. After liberalization in 1979, China has been the world's fastest-growing economy with a sustained economic growth rate of 9.5% annually. China has been able to create dominance in the area of trade, economy, or the military around the globe. But in the long haul, China always yearns for dominance in the financial space which is enjoyed by the United States as mostly all the currencies are pegged by the dollar, Renminbi too. This forcibly makes China play by the rules laid by the United States globally. To reduce dependence on the dollar and to overcome the dollar weaponization by the US, in the form of sanctions, China slowly and strategically started investing in technology in the field of finance. And for this, It embraced the blockchain technology and the People's Bank of China (PBoC) unveiled a plan to launch a digital sovereign currency (e-Renminbi) by May -2021, Making China the first country to do this.

Digital Currency Electronic Payment (DC/EP)

In Mid 2019, when Facebook with 2.7 billion users worldwide announced that it's launching its own currency, Libra, it shook the Central Banks across the world. They can't fathom the use of decentralized currency which is owned by a private label. China too was averse of the scale at which Libra can go into the financial market. China kept its stance negative on the use of digital decentralized currency as according to her it risks the sovereignty of the central banking system but on the other hand, in Nov-2019 China announced that it is working on the project of digital currency from past 4 to 5 years.

  • The project goes by the unofficial name of Digital Currency Electronic Payment (DC/EP), will be running on the trial basis in four major cities of China naming Shenzhen, Suzhou, Chengdu, and Xiong’an from May 2019.

  • In this trial, many government employees and public servants will receive their salary of May digitally in their digital wallets.

  • Wallets will be issued by the four major banks of China without any requirement of the bank account.

  • Many US restaurant firms like MacDonald and SubWay have given their nod for this trial.

  • The transactions form DC/EP wallet can be done without any internet connection in the mobile devices.

With huge penetration of third party payment applications like Alipay and WeChat in the Chinese market, highest in the world, the adoption of centralized digital currency will be not so difficult task for the Chinese people.

Salient Feature of e-RMB (electronic-Renminbi)

  • The e-RMB will be backed by the PBoCs Asset and revenue which has the taxing power of the world's 2nd largest economy making it fundamentally strong digital currency.

  • The e-RMB (e-Renminbi) will not be limited to just one platform but rather behave like banknotes and coins.

  • China's Authority promise that e-RMB will be anonymous. It is not in absolute terms as the big data can identify some behavioral characteristics of particular transactions. They called it controllable anonymity and claimed to provide a balance between anonymity and tracing.

  • e-RMB will be pegged by physical currency it eventually going to have the same exchange rate as the physical renminbi, which will make cross border transactions seamless.

Future of Global financial Space

  • China's move towards changing the world's transaction market poses a threat to the supremacy of the US dollar as a reserve currency. Today US dollar account for the 90% of world transaction and 60% of all foreign exchange reserve in world compare to which China's Yuan lie far behind with only limited countries using Yuan for cross borders transactions and accounts for only 2% of total foreign exchange reserve in the world.

  • e-RMB will knock off the need to hedge cross border transactions by the dollar. Traders (the buyer of goods and sellers of goods) can lock the amount in a virtual lockbox that cant be open by any entity until a certain obligation (or delivery of goods) is met. If the seller fails to meet the obligation (or delivery) the buyer will get back the money at the initial exchange rate, eliminating the risk of currency fluctuation, which is hedged by the dollar these days.

  • Wider adoption of the renminbi led by the e-renminbi will help China to realize its goal to be a world superpower by 2050.

China's digital currency move is a clear threat to western hegemony in currency space. While many central banks have the plan to launch there own digital currency, China as a first-mover and that too when the world is dealing with an earth-shaking crisis COVID-19 will be going to benefit China a lot.

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