China could depend on Europe & USA with planned digital currency

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Beijing, Frankfurt Mu Changchun is someone whose name few in the Western world know. But that could change drastically in the coming weeks. Because the Chinese is currently driving a groundbreaking innovation in his country. Mu, vice director at PBOC, is responsible for payments, and seems to be ahead of any other central banker in developing a digital government currency. "The digital currency of the central bank can be described as finished," he announced a few days ago surprisingly.

The sentence marks a caesura. If China actually implements its plans, the People's Republic would be the first country with its own digital currency. Canada, Sweden and Uruguay have been working on such plans for some time, but so far no country has managed to present a national virtual currency. A state digital currency would be a powerful tool – but it also carries many risks.

The rush, however, has a valid reason. Martin Chorzempa, an expert on Fintechs and China at Washington's Peterson Institute of International Economics, sees other experts in accelerated development responding to Facebook's announcement this summer of launching its own currency, Libra, in 2020. "Without the announcement of Libra, the Chinese would probably not rush so fast," says Chorzempa.

This is also suggested by remarks by Wang Xin, head of the research department of the PBOC. Libra has made the project of its own digital currency more urgent, he said. China started early in electronic payments. "But a lot of work is needed to consolidate our lead." Libra could lead the world to be dominated by the dollar and the US.

"A globally successful digital currency controlled by US companies is a nightmare for Beijing," says Markus Demary, financial market expert at the Institute of German Business. The "E-Yuan" was deliberately a creature of the Chinese central bank – even if it were published together with banks and technology companies.

Long preparatory work

The Chinese central bank started the major project about five years ago. Since last year, the researchers had "996" worked on it, so Mu – a term in China for the common in the tech industry common working hours from 9 clock to 9 clock in the evening, six days a week. So far, little is known about what the concept for the digital currency could look like. First, China wants to reduce the cash in circulation – for fraud protection, so central bankers Mu. The currently existing means of payment could be relatively easily forged and used for money laundering and terrorist financing.

In fact, counterfeit money is a big problem in China. Those who pay with 100-yuan banknotes (around 13 euros) – the largest note in China – whose appearance is usually subjected to a quick check. "At the moment, the PBOC's digital currency seems to be focused on payments in retail banking rather than wholesale," said Boon-Hiong Chan, Chief Analyst at Deutsche Bank's Global Transaction Bank. But that alone would be a "groundbreaking step in the history of banking," Chan said.

In the long term, the Chinese central bank can then penetrate into the wholesale business and the capital market – the possibilities of the initiative are "enormous".

However, experts doubt that China is actually as far in the development of its own digital currency as it claims. "It seems unlikely that China will introduce its digital currency overnight on a large scale," says Mirjam Meißner, director of the Berlin-based China consulting firm Sinolytics. Because the necessary storage capacities for it were only in the structure. Far more realistic is the timely introduction of pilot projects in which the Chinese central bank tests its digital currency. "For example, recently published plans for the Special Economic Zone in Shenzhen provide that Shenzhen should introduce a digital currency," said Meissner. This includes, among other things, experiments to better control cross-border financial transactions.

The Chinese are very open to digital forms of payment. Already today, most people pay mainly in big cities like Beijing with their smartphone and the Chinese services WeChat or Alipay. Chan sees one of the motives of the Chinese central bank as being too uncertain about this type of payment. "At the moment, Chinese consumers rely entirely on non-banks like Tencent or Alibaba for their digital payments," Chan said. In principle, this is not a problem, but if these digital companies fail, consumers may lose confidence in the digital payment system outside the bank. "The fact that a central bank supports the digital currency could increase the level of financial stability," Chan said.



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