China to Expand Digital Currency Pilot Programs, Questions Remain
China is set to expand its digital currency testing programs to more regions and cities, including some of the country’s most developed financial hubs.
China’s Ministry of Commerce released a statement Friday, stating that the digital yuan pilot program would cover most Chinese cities and regions such as Beijing, Hebei Province, Guangdong Province, and midwest regions.
“We will carry out digital RMB pilot projects in the Beijing-Tianjin-Hebei region, the Yangtze River Delta, the Guangdong-Hong Kong-Macao Greater Bay Area, and in the central and western regions where conditions permit,” the statement said.
It added that the People’s Bank of China (PBOC), the country’s central bank, will formulate policies and lead the projects. What’s more, Shenzhen, Chengdu, Suzhou, Xiong’an New Area and relevant departments of the 2022 Winter Olympic Games will assist in the promotion of the projects. Follow-up projects will be expanded to other regions as appropriate.
At present, the digital RMB pilot programs have basically completed top-level design, standard formulation, functional research and development, and joint debugging and testing. Recently, the official digital currency is undergoing closed internal pilot tests in some Chinese cities, state-owned media People’s Daily reported.
China’s digital currency, or the DC/EP for short, is the electronic version of RMB that can be used in various scenarios just like paper currency. The DC/EP can be used without being linked to any bank account, and the relevant technology integrated into the digital currency will ensure that the money can be used in certain extreme conditions, such as when Internet connection is not available, People’s Daily said.
Regarding the novelty of the digital currency, the public is concerned about whether it will impact or replace the current payment method, such as Alipay, and WeChat Pay.
In the current domestic payment market, Alipay and WeChat Pay are the two most popular payment systems. In the third quarter of 2018, Alipay and WeChat Pay continued to occupy an absolute share of the third-party mobile payment market in China, reaching 92.53%, according to 2019 China Mobile Payment Development Report.
According to Dong Ximiao, a researcher with the National Institution for Finance and Development, the central bank’s digital currency is legal tender, while WeChat Pay and Alipay will serve as payment methods. Specifically, if institutions or individuals do not accept Alipay or WeChat Pay, there is no legal problem but it is illegal to refuse users who use cash or digital currency.
“For ordinary people, it means an additional payment option. But Alipay and WeChat Pay have been generally accepted. After the launch of digital currency, will everyone accept it and will it be more convenient than the current mobile payment tools? This remains to be seen,” said Shi Guang, deputy director of the Banking Research Office of the Financial Research Institute of the Development Research Center of the State Council.
Lan Hongming, an investor who researched blockchain at QF Capital, is also concerned about the level of convenience of the digital currency. ”I don’t know in what form it will be introduced to the public. It is possible to embed the digital wallet function in the bank or Alipay or WeChat Pay apps.”
“There will be infrastructure challenges during implementation,” Lan said. “Each additional step will take longer to promote the digital currency. For example, when customers pay at a restaurant, should restaurants also install a digital wallet? These are all issues of basic infrastructure.”
In the context of the current COVID-19 pandemic, perceptions that cash could spread pathogens may change payment behaviour by users and firms, according to an April report from Monetary and Economic Department of the Bank for International Settlements (BIS).
Economists forecast in the report that resilient and accessible central bank operated payment infrastructures could quickly become more prominent.
“The pandemic may hence put calls for central bank digital currencies into sharper focus, highlighting the value of having access to diverse means of payments, and the need for any means of payments to be resilient against a broad range of threats,” the report said.
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Payments via the upcoming Chinese sovereign digital currency could be contactless and the transaction can be achieved when two mobile phones with electronic wallets get close to each other, Mu Changchun, head of the PBOC digital currency research institute, said earlier.
In April, PBOC started testing its government-backed digital currency in some regions before it introduces it to the public. Pilot programs have been launched in Shenzhen, Suzhou, Chengdu, and the Xiong’an New Area, Hebei Province.
In July, China’s ride-hailing giant Didi partnered with the central bank to jointly explore the application of the digital currency on smart transport platforms.
The PBOC has been researching the digital currency since 2014. The State Council approved the PBOC’s digital currency development program at the end of 2017, together with some qualified commercial banks and institutions.
