China's Progress Towards a Central Bank Digital Currency
'New Perspectives on Asia' highlights the research of junior CSIS staff and interns on issues that are quietly shaping the world's most dynamic region.
Over the past several years China has been steadily making progress towards a digital renminbi, and now seems poised to become the first major economy to launch an official central bank digital currency (CBDC). Yet the reality is more complicated than that, as China’s digital currency project faces a variety of challenges at home and abroad. Though the Chinese government is further ahead in digital currency research than any other major economy, these economic and political challenges mean that after nearly a decade of development and several years of localized testing there is still no clear date for a full-scale launch of China’s digital renminbi (also known as the digital yuan, or e-CNY).
China has been exploring a potential digital currency since 2014, although the first actual test of the e-CNY system was not until 2020 with an initial trial launch in Shenzhen, Suzhou, Chengdu, and Xiong’an. These tests were expanded in 2021 to Hainan province, Shanghai, and a number of other cities. As of April 2022 further expansions are planned for other major Chinese cities and Hong Kong, as well as a likely release at the Fall 2022 Asian Games. 2022 also saw the e-CNY’s highly anticipated trial launch at the 2022 Winter Olympics – the first of such trials to include foreign visitors.
While a timeline for the final launch of the digital renminbi is uncertain, China’s goals in creating one are much clearer. In 2021 China joined a number of other countries in exploring the possibilities of using digital currencies for cross-border transactions, a decision in line with Beijing’s long-term goal of boosting the yuan’s relatively low use outside of the Chinese domestic market. At around 3 percent of international payments the renminbi is a distant 4th place to the U.S. dollar (nearly 40 percent) and the Euro (over 35 percent), in stark and disproportionate contrast to China’s 2nd place share of global GDP (17.9 percent to the U.S.’ 24.4 percent). Meanwhile at home, the Chinese government has long been clear on its intention to limit the power and market share of both commercial banks and digital payment corporations that operate independent of the state, especially Alipay (owned by Alibaba) and WeChat Pay (owned by Tencent). Some observers have pointed out that a centralized digital currency would allow Beijing to more closely watch both individual transactions and the powerful Chinese private financial technology sector.
Although China already has a substantial digital payment market and infrastructure, the digital yuan has so far had trouble breaking into that market. The private sector digital payment service market is very popular in China, but is owned almost entirely by Alipay (over 50 percent market share) and WeChat Pay (almost 40 percent market share), which boast over one billion users each. The e-CNY system is still technologically inferior to these alternatives in terms of capacity and scalability. As an example, the e-CNY ranges from 10,000 transactions per second to a projected future capability of 300,000, compared to over 500,000 for Alipay at its 2019 peak. It also raises a number of technical questions including who exactly will be liable for e-CNY claims and how entities other than major commercial banks will be able to participate in the system, leaving the e-CNY in a position where it has more downsides than its competitors and few upsides.
Indeed, the main problem facing the digital renminbi domestically lies in encouraging its use in the first place. On paper there are over 261 million e-CNY wallets, a substantial increase in number of users. However closer inspection reveals that most of these wallets are practically empty and most likely not in active use, with the average balance for individual wallets being RMB 3 (less than $0.50). Feedback from the last few years of trials revealed little interest in the average user in switching to the e-yuan system when more developed and convenient alternatives already exist. Public perception is that the e-CNY doesn’t offer any reason to change due to issues ranging from lack of education on use to concerns over privacy to the generally inferior quality of state products. Some analysts speculate that the e-CNY will not be able to overtake private-sector alternatives at all without substantial government interference to the point of mandatory use.
If the e-CNY finds difficulty establishing itself at home, it faces far steeper odds cementing itself in the global financial system. Many of the reservations held by Chinese users are mirrored and magnified in international observers. Western countries in particular are unlikely to readily use a system that could allow China to gain real-time information on their economies, or that could be used to undermine U.S. and European sanctions.
These concerns seem to have been borne out in reality in the e-CNY’s 2022 Winter Olympics trial run, which was moderately successful but had issues with poor publicity. While the 2022 Olympics were the first time the e-CNY system was available to foreign visitors, most non-Chinese attendants reported preferring to use Visa, an official sponsor of the Olympics and the only private-sector digital payment platform available at the Games. Many attendants had never heard of the digital yuan at all. According to Mu Changchun, director of the People’s Bank of China’s Digital Currency Research Institute, digital yuan wallets saw use almost exclusively among Chinese visitors while foreign visitors used either Visa or physical cash. While the 2022 Olympics did prove that Chinese consumers could and would use the digital yuan if no alternative existed, its failure to find a footing among foreign consumers seems to reflect the relative lack of use of both the digital and conventional yuan outside of China. And unless China is able to boost international trust in its political system and institutions, it is likely to stay that way.
Outside of China, both the e-CNY program and CBDCs in general have begun to attract widespread interest from major governments. Japan’s new Minister for Economic Security indicated that Japan’s comparatively slow progress on CBDCs could pose a national security risk. The European Union went from reporting on the possibility of a digital euro project to starting the project in only 9 months. In the U.S. both Federal Reserve Chairman Jerome Powell and Treasury Secretary Janet Yellen have signaled administration support for research into a digital dollar, while President Biden has ordered research into both the digital yuan and a potential digital dollar. As of yet it is unclear what form these other countries’ CBDCs might take.
While Beijing has made substantial progress over the past several years in developing a digital renminbi, it still faces many significant challenges preventing widespread use. The question remains how effectively the Chinese government will navigate these challenges. While Beijing may be able to encourage use of the digital yuan within its borders, without a substantial shift in either the Chinese political system or international perception it is unlikely to spread beyond them.
Theodore Benzmiller is a former research intern with the Economics Program at the Center for Strategic and International Studies (CSIS) in Washington, D.C.
'New Perspectives on Asia' is produced by the Center for Strategic and International Studies (CSIS), a private, tax-exempt institution focusing on international public policy issues. Its research is nonpartisan and nonproprietary. CSIS does not take specific policy positions. Accordingly, all views, positions, and conclusions expressed in this publication should be understood to be solely those of the author(s).