Could a CBDC turn the yuan into a global currency?

Since the first day I started covering stories about the digital yuan, one question has occupied my mind constantly — What is the real relationship between the country's push toward a central bank digital currency, or CBDC, and yuan internationalization?

Some argue that these are separate topics that should not be confused with one another. E-CNY is only a digital form of the yuan, on par with the physical form. It barely impacts the currency's internationalization, which instead depends on the country's economic and trade heft as well as financial opening-up progress.

But others believe the opposite, contending that e-CNY may play a necessary position in internationalizing the yuan and even transforming the geoeconomic landscape.

An e-CNY themed exhibition is held during the 2022 China International Fair for Trade in Services (CIFTIS) held in Beijing in September. [Photo/Xinhua]

My perspective on this topic is that e-CNY may indeed have limited actual impact on yuan internationalization in the short term due to its focus on domestic retail scenarios.

But strategically, boosting the Chinese currency's global profile would require a robust ecosystem of e-CNY as the rise of multiple CBDCs across the world is changing the determinants of a currency's competitive edge.

In late September, the mBridge platform — which explores multilateral cooperation regarding CBDC international payments — completed its first real-trade pilot test with four CBDCs including e-CNY, supporting more than $22 million in foreign exchange transactions. That amount appears to be small as official data showed the value of transactions using e-CNY in domestic pilot areas had topped 100 billion yuan ($13.8 billion) by the end of August, demonstrating e-CNY's current focus on domestic scenarios.

While many developed economies focus CBDC development on cross-border payments, the emphasis of e-CNY should be put on retail payments to facilitate people making daily transactions, said Zhou Xiaochuan, former governor of People's Bank of China, the central bank.

But Zhou also recognized that domestic retail applications can pave the way for cross-border e-CNY transactions.

"Obviously, (CBDC) retail payments act as an important basis for cross-border payments," Zhou said while addressing a forum last month. "If two countries do not have efficient and secure digital currency retail payment arrangements, cross-border connectivity would be difficult."

Declaring its intention to explore cross-border CBDC applications, the PBOC vowed in an article this month to deeply participate in international digital currency governance.

Apart from taking an active part in the mBridge project promoted by the Bank for International Settlements, or BIS, the PBOC has launched technical tests for CBDC payments between the Chinese mainland and Hong Kong, the article said.

As the infrastructure for cross-border CBDC payments matures in the future, e-CNY may help slash the time and money costs of international payments and settlements, potentially encouraging more global use of the renminbi.

A BIS report has noted that multiple CBDC settlements were able to complete international transfers in seconds, as opposed to the several days normally required for any transaction to be completed using the existing network of commercial banks.

In a world where nine out of 10 central banks are exploring CBDCs, it is needless to say that those who cannot catch up with others in facilitating fast and safe international CBDC transfers would lose some appeal in the global currency landscape.

This is one of the key reasons why a robust e-CNY system would be a prerequisite for internationalizing the yuan over the long run.

As Song Ke, deputy director of the International Monetary Institute at the Renmin University of China, puts it, the core of currency competition may shift from grabbing more trade shares to providing information services for payment networks as CBDC systems mature.

By then, economies with a sound basis of digital services can pursue new paths of currency internationalization while the monetary sovereignty of those with weak strength in information technology could be impaired, Song said.

"It is too early to discuss the impact of the digital yuan on the global currency landscape," he said. "But the influence of CBDCs on the reform of the international currency system would be far-reaching."