Currency War: Will China's e-RMB fade out dollar's global sheen?
Abhishek G Bhaya
China is poised to launch, what would be the world's first state-backed digital currency.
Earlier this month, China's Commerce Ministry outlined a plan for a digital renminbi trial over the next three years in some of the country's most developed regions including north China's Beijing-Tianjin-Hebei region, east China's Yangtze River Delta and south China's Guangdong-Hong Kong-Macao Greater Bay Area. The Central Bank Digital Currency (CBDC) has already undergone internal bank trials in Shenzhen, Chengdu, Suzhou and the Xiongnan New Area.
With the world witnessing rapid transformation in how international trade and commerce are conducted in the wake of China-U.S. friction and the COVID-19 pandemic, Beijing's digital currency is drawing a lot of attention. What role will China's digital yuan have in this new world? How will it impact global trade and e-commerce? And most importantly, will the digital yuan curb the global dominance of U.S. dollar as a reserve currency?
To understand the various facets of China's digital currency that has the potential to revolutionize global trade and finance, CGTN's International Editor Abhishek G Bhaya spoke with Shanghai-based American FinTech expert Richard Turrin.
Turrin has authored the best-selling "Innovation Lab Excellence" and is currently in the process of completing his next book on China's digital currency. He previously headed IBM's FinTech Innovation Lab in Singapore and IBM's banking risk technology team in China following a 20-year career in banking.
Bhaya: Amid the ongoing China-U.S. financial cold war and talks of economic decoupling, some analysts predict a heightened currency war. Do you see the CBDC playing a role in challenging the global dominance of the U.S. dollar?
Turrin: Absolutely. I've written a few articles on this and this is the topic of my coming book, really. Let's look at a quote from Mr. Zhou Li, former deputy director of the Communist Party of China's International Liaison Department. He said, "By taking advantage of the dollar's global monopoly position in the financial sector, the U.S. will pose an increasingly severe threat to China's further development." Think about that for a second.
The CBDC is being launched into an increasingly separate world, a world where China and the U.S. do not get along.
Now when you look at the banking sector, you're looking at transfer of money, foreign exchange, all of this is controlled by a U.S.-dominated financial marketplace. Which means, that fundamentally China could be cut off from this financial marketplace if the United States ever decided that they wanted to retaliate against China, and this is something that is not far-fetched because we've just seen U.S. retaliation against TikTok and WeChat.
The centerpiece of this financial system is the SWIFT cash transfer system, which is actually a messaging system and it transfers cash all over the globe. So what you see is the CBDC being used as a means of decreasing China's dependence on the U.S. dollar and the U.S. financial network which it technically could be blocked from or prohibited from using.
So yes, when the CBDC was conceived seven years ago, this was not the plan. … But it is now showing how FinTech and digital currencies can be used to decrease dollar dependence for China. Now, how much less dependent China can become is a matter of debate.
Turrin: Let's look at international trade in China. Right now, China is the world's largest exporter which is worth around 2.5 trillion U.S. dollars. At present, much of those exports are denominated in dollars. So the question is, how do we take some of these and convert them from dollar-based exports into yuan-based exports so China gets to use its own currency. And that's the fundamental role the digital RMB will play.
Most people talk about dollar dominance saying the U.S. dollar is the world's biggest currency. It is the currency for most of the world's trade and investment, and that's true, no argument. And for the record, dollar dominance will not end.
However, look instead at trade as opposed to dollar use in both investment and trade. If the trade part is separated and, say, a portion of China's 2.5 trillion U.S. dollars in exports is revalued into e-RMB, you can actually leave a significant dent on the dollar.
Now, how is China going to do this? The e-RMB is going to be a ticket to this transformation.
Bhaya: How does the digital currency fit in with the vision of China's Belt and Road Initiative? Can we expect a transformation in infrastructure financing through institutions such as AIIB?
Turrin: There's an entire universe of Belt and Road countries that have debt denominated in RMB. They trade with China in RMB. For them, RMB is a natural currency. And the amount of trade with these countries is not small. It was actually worth 1.34 trillion U.S. dollars last year. So, these countries are the natural first users of the digital RMB.
I get it that somebody from the United States says, "I don't want to use it." And that's fine. You don't have to, nobody's going to force you to use digital RMB. However, you might want to, if you get preferential forex rates or financing.
So, Belt and Road and Asia Development Bank are really great fits for using e-RMB.
China will try to work out all the aspects of the digital RMB in domestic market first. Only after it's flawless and works perfectly, will it start to transfer over to the international trade markets. I would bet a year to 18 months before we start to see significant use of digital RMB in trade between Belt and Road countries, but it is definitely coming.
And it's part of a greater plan to increase the use of the RMB for China and decrease the use of dollar. It's a very important strategic tool for China.
Bhaya: The COVID-19 pandemic has heightened the usage of digital platforms and transactions across the world, and more so in China, which is the world's largest digital market. Will it be right to assume that the world is much better prepared for a digital currency today than it was a few months before?
The United States is really the best example. They went from no interest in a digital currency to actually having a Senate bill talking about launching digital dollar for making stimulus plan payments to people. The section of the bill was eventually removed but the fact that it made it into an actual bill itself was really quite remarkable. So yes, COVID-19 completely pushed the agenda for digital currencies forward across the globe.
Bhaya: Please tell us a bit about your new book on China's digital currency. What is it called?
Turrin: The book is coming out sometime in October. I have two more chapters to write. The original title was "China's Digital Currency Revolution" but we have a new title now. It's precisely about the questions you've been asking me before. The new title is called "Death of the Dollar: Profit from China's Digital Currency Revolution."
The book is about how once the digital currency is launched, and once it makes it into international trade, there will be a choice. Right now, much of the world has no choice but to use the dollar in international trade. But when the CBDC comes out, there will be an option.
The critical point is that it doesn't mean that the dollar is dying. It's not. But it will have to share the spotlight with the digital RMB. And that is going to be a significant change for the world's currencies.