China’s emerging digital currency could enhance the yuan’s importance in the international financial system at the expense of the U.S. dollar and extend the Chinese surveillance state into wallets around the world.
A combination of visibility of currency users and technical control is a monetary dream for Chinese communist officials, who have staked their regime on their ability to monitor and curtail private activity within China. The digital yuan’s acceptance beyond mainland China could give the regime a significant geo-economic tool, one that bypasses the network of banks and financial institutions that are subject to U.S. laws and binds client states more directly to Beijing.
Beijing’s moves come amid tensions with the Biden administration as the new government in Washington continues calibrating its China policy after the Asian giant’s tactics led former President Donald Trump to sour on its president, Xi Jinping, after spending years touting their alleged friendship. Before Trump, former President Barack Obama grew equally frustrated with Chinese officials, sources said at the time. Now, it’s Biden’s turn.
“There’s no anonymity, which [means] the central bank and the central government is going to watch you and how you spend your money,” said former Department of Commerce assistant secretary Nazak Nikakhtar. “It’s programmable.”
China’s moves with the yuan are merely its latest after the Trump administration in August 2019 designated the country a currency manipulator as experts see a a threat to the American dollar, long the currency of choice for global business. “If the internationalization of the yuan steadily moves forward, the competitive landscape of the dollar and the yuan would drastically change,” Nomura Research Institute executive economist Takahide Kiuchi told Kyodo News last month.
Chinese monetary experts maintain that their ambitions are modest. “If you are willing to use it, the yuan can be used for trade and investment,” former People’s Bank of China Governor Zhou Xiaochuan said in December. “We don’t have an ambition to replace existing currencies.”
And yet, the developing countries that have joined China’s vaunted Belt and Road Initiative, an overseas infrastructure investment project that U.S. officials regard as a “predatory” lending scheme, appear already to be targets of China’s determination to turn a digital yuan into a tool of international finance.
“If it’s a long-standing loan … they’ll expect that that foreign actor will repay them in China’s digital currency,” said the Atlantic Council’s Julia Friedlander, a senior member of the Treasury Department’s sanctions office who did a stint at the White House National Security Council from 2017 to 2019 under Trump. “It’s trying to create areas of dependency in the way that, say, Belt and Road has created sort of debt-trap diplomacy. It’s monetary diplomacy, in a different way.”
U.S. officials, confident in the primacy of the American dollar, are in no hurry to match China’s digital currency developments.
“Because we’re the world’s reserve currency, principle reserve currency, we don’t need to rush this project, we don’t need to be first to market,” Federal Reserve Chairman Jerome Powell said at the Bank for International Settlements Innovation Summit in March. “A dollar CBDC [central bank digital currency] would have potentially large implications here and around the world. And we’ll be sure to think carefully about all of that and engage very broadly with the public, around the world and particularly here in the United States, before we even approach a decision.”
Nikakhtar, who led the Commerce Department’s Industry and Analysis team at the International Trade Administration, has a more ominous forecast.
“They’re just trying to create an alternative,” she said. “This is basically creating an epicenter and hoping [that it’s] like a magnet that draws everything out from the United States towards this other center.”
Some analysts agree that China’s digital yuan represents a step toward the “internationalization” of Chinese currency, but the significance of this maneuver is still a subject of disagreement in monetary circles.
“The digital yuan is not a direct threat to the U.S. dollar,” a Senate Republican aide who was not authorized to speak on the record said, surmising that Beijing is trying to meet the demand for alternative digital and cryptocurrencies before the Chinese population adopts new systems that regime officials can’t control. “There’s really not much difference between the digital yuan and the Chinese banking system, as it was.”
Corruption (and the Chinese Communist Party’s need for control) has undercut the global appeal of the yuan, even as China developed into the world’s second-largest economy. “Unless and until Beijing addresses these questions, a CBDC will not be able to pose a serious threat to the U.S. dollar,” Belt and Road News, an outlet in Hong Kong, concluded in a recent assessment.
Yet, Nikakhtar suspects that such prognostications underestimate the willingness of Western governments and corporations to pursue short-term profit. She argues that federal officials should be moving faster to launch an American digital currency, while negotiating with multilateral institutions to develop a “digital currency framework” that could preclude predatory Chinese behavior.
“At least create international principles of what a digital currency framework needs to look like so that the gravitational pull doesn’t go in China’s direction,” she said. “And help other countries roll out their digital currencies by having this framework of what it needs to look like.”
In the meantime, the digital basis of the new yuan could make the novel currency accessible to people who might struggle to reach a brick-and-mortar bank.
“The digital yuan would enable emerging economies to swiftly and conveniently carry out payment and settlement operations at low cost,” Kyodo News, quoting a central banker from a nation in Southeast Asia, reported. “The possibility cannot be ruled out that the yuan will rapidly build a position as key currency in a China-led economic zone.”
That dynamic could render the digital yuan a boon for malignant forces, from terrorists to rogue states.
“If the Chinese dollar has this … sub-domain where it’s the reserve currency of Belt and Road,” the Senate Republican aide acknowledged, “it becomes a little bit less of a death knell to these banks in directly violating our sanctions.”