For years, China’s efforts to develop a digital currency seemed intended for domestic use only. The introduction of an “e-yuan,” which is still being tested, would help China go cashless while giving the central bank tight centralized control over digital money.
However, a new development appeared on July 16: A government white paper shook up financial markets by saying China was exploring cross-border payments for the e-yuan.
The digital yuan now appears to be the latest in a decadelong series of steps to internationalize China’s currency and ultimately curb the global dominance of the dollar settlement system.
The White House, according to several news reports, regards the new Chinese e-currency as a possible effort to undermine the dollar. Meanwhile, the future of the greenback as the undisputed hegemon in global finance is being questioned as the U.S. prints money to pay for economic stimulus programs. Other countries, fearful that their reserves of dollars will be debased, may seek alternatives. This applies most of all to China, the largest foreign holder of U.S. dollar reserves.
The situation is oddly symmetrical to that of 50 years ago this month, when the present era of global finance was created by then-U.S. President Richard Nixon. In August 1971, he took the U.S. off the international gold standard and allowed the dollar to devalue.
Today, a new era in global economics is dawning that is as unpredictable as the last.
China has stepped up its efforts to internationalize the yuan, partly to limit any fallout to its own economy from increasing tensions with Washington. In addition, China is responding to concerns that Washington is weaponizing the dollar to impose sanctions on China. Already Washington has sanctioned Chinese companies like Huawei Technologies as well as Chinese officials dealing with Hong Kong and Xinjiang.
“China’s race to develop a central bank digital currency has to be seen in the context of Beijing’s efforts to wrest global influence and power from the U.S.,” said Diana Choyleva, chief economist at Enodo Economics, which focuses on China. The digital yuan “is a key component of an alternative to the dollar-based order that Beijing is building.”
The success of the digital yuan depends on adoption by other countries, she said.
“By making cross-border payments easier and cheaper, the embryonic yuan system could hold particular appeal for emerging markets that are held back by costly access to dollar-based global payments but also want to reduce their dependence on the dollar for geostrategic reasons,” Choyleva said.
