Digitalize Your Wallet (Cash): China’s Digital Currency, Fintech Companies, and Technology Race with the West

By Chuyan Cheng

After a year full of undesirable turbulence, we reached a moment of celebration – the Spring Festival arrived as the next blossom season approached. While people stocked up on daily necessities for this once-a-year holiday, Chinese authorities took the chance to test the country’s newly developed central bank digital currency (CBDC), the Digital Currency Electronic Payment (DCEP). In pre-Covid times, spending on retail and catering services during the New Year holiday hit 1.01 trillion yuan, or approximately $146 billion. Given the on-and-off lockdowns being imposed in both urban and rural areas as domestic Covid-19 cases increase, e-commerce and online shopping in China is steadily replacing traditional businesses that do not provide contactless service. This preference for no-contact transactions made it the perfect time for authorities to let citizens try out DCEP as a new payment option. 
From February 10th to 17th, residents in Beijing were given the opportunity to attain red packets filled with 200 digital Yuan through a lottery hosted by the district government. The winners will receive the funds in e-wallet apps specifically developed by commercial banks for DCEP. Over the course of the week, 10 million digital Renminbi were distributed, with the lottery winners being able to spend their extra income in the Wangfujing commercial zone or digitally at China’s e-commerce giant JD for a wide range of merchandise, from everyday needs to luxuries. This is not the first time the government has organized a giveaway as a way to spur the adoption of DCEP. Previous DCEP pilot projects in Shenzhen, Suzhou, Xiong’an, and Chengdu led to 4 million transactions totaling 2 billion yuan ($300 million). 
For years, discussions about digital currencies were focused on the potential (or lack thereof) of decentralized cryptocurrencies like Bitcoin. These kinds of currencies are built to defy regulation and control by central banks or government regulators. A government-backed digital currency from China would be the antithesis of Satoshi Nakamoto’s vision. PBoC’s plan to develop its own digital currency reveals that China perceives the emergence of a new digital financial ecosystem as a threat to their ability to maintain control and stability over their country’s financial sector. The threat comes not only from cryptocurrencies like Bitcoin or Facebook’s Diem, but also domestic fintech giants like Ant, whose aggressive expansion into financial services has triggered a harsh crackdown by regulators. 
By creating their own digital currency, China is hoping to pre-empt these efforts and encourage its population to instead sign on to a digital ecosystem firmly within state’s domain of control. Though the fact that the inner technology of DCEP is blockchain-based may give the illusion that it will allow its users to claim some of the privacy benefits allowed by cryptocurrencies like Bitcoin, in reality the central bank would have full access to both transaction histories and the true identity of users, making anonymity impossible.  
The success of DCEP could spell trouble for large Chinese fintech companies, particularly Tencent and Ant Group, an affiliate of Alibaba. E-wallet applications such as Alipay and WeChat pay could become obsolete if DCEP replaces these apps as the dominant platform for digital transactions. On top of that, China’s growing focus on enforcing antitrust regulations to combat potential tech monopolies sends unfriendly signals to these entities that nearly dominated the e-commerce and digital payment markets. The platforms are unlikely to be replaced anytime soon, however, as the ecosystems of existing e-wallet apps will likely be robust enough to counter the challenges posing from DCEP thanks to their ability to provide a wider ranges of financial services. For now, DCEP plays the role of substituting the fiat money in circulation, and can even be integrated into the same e-wallet applications it may threaten in the future.  
China’s leaders have announced their intention to “modernize the financial system” as part of the 14th Five-Year Plan approved by the Party’s Central Committee four months ago, and DCEP is likely to play a key role in this. Authorities hope that DCEP could help in preventing the monetary system from falling into a liquidity trap, where increasing the money supply is no longer effective at incentivizing economic growth or saving the economy from a potential recession. Furthermore, thanks to the transparency CBDC could provide as to monetary circulation, central banks could improve their ability to precisely implement macro-level policies on interest rates. 
The rise of DCEP and e-wallet apps will create new privacy risks as these services become more popular and the Chinese government consolidates its control. Attempts to implement digital payment applications and the DCEP across China will be occurring at the same time as new data protection measures begin to enter into force. Recent research by the PBoC indicates that major tech firms have collected large amounts of personal data from backend databases about their users without clear consent. The Party is determined to integrate emerging technologies into financial sector at a faster pace, but this increases the urgency for regulators to come up with a holistic framework for handling the sensitive transaction data stored within the DCEP system. 
As the digitalization of currency shifts the way in which we have conventionally understood money and transactions, it also paves the way for a “sci-fi” future of easy and contactless access to services. From an international perspective, the global trading environment will be revolutionized once more countries begin rolling out their own CBDC schemes. Along with previous Chinese strategic initiatives such as the Belt and Road Initiative and Made in China 2025, DCEP could be utilized as digital ammunition for pressuring developing nations seeking foreign investment to integrate with China’s self-directed financial system. As the first country to deploy central bank-backed digital currency, China is gearing up to set the ground rules for the latecomers and shape narratives around CBDC. Policymakers should take careful note of how China is positioning itself given the likely significance of CBDC as the global economy becomes increasingly digitized. 

Chuyan Cheng is a research intern with the Strategic Technologies Program at the Center for Strategic and International Studies in Washington, DC.

The Strategic Technologies Blog is produced by the Strategic Technologies Program at 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).