China’s digital yuan will need to dethrone the country’s domestic e-payments giants first, before it can think of competing against the greenback internationally, says the Peterson Institute for International Economics’ Martin Chorzempa.
“A lot of people talk about (the digital yuan) being a driver of renminbi internationalization,” Chorzempa, senior fellow at PIIE, told CNBC’s “Street Signs Asia” on Wednesday. “I think they have to beat Alipay and WeChat Pay in China before, I think, that they can make a dent in the U.S. dollar.”
“It’s going to be essentially the central bank versus the big tech companies and that’s going to be quite interesting to watch,” he said.
China’s central bank has been developing the digital yuan and it is expected to work in a similar way to transactions through existing payment apps. The country’s capital city Beijing recently handed out $1.5 million as part of a digital currency test during the Lunar New Year, following similar experiments in Shenzhen and Suzhou.
Photo taken on Feb. 12, 2021 shows a digital RMB red envelope during the “Digital Wangfujing Snow and Ice Shopping Festival” in Beijing, capital of China.
Costfoto | Barcroft Media via Getty Images
Chorzempa said one of the main reasons spurring the push for the digital yuan was the desire for a state backed and controlled alternative to incumbent giants such as the Alibaba-affiliated Alipay app and Tencent’s Wechat Pay, which currently process about 95% of digital payments in China.
Unlike most other major economies globally, mobile payments — largely through the Alipay app and Wechat Pay — has displaced cash in the last few years as the predominant form of consumer payment in China.
“(The digital yuan) is something that’s really unprecedented among the major economies,” Chorzempa said. “China is … by far the most advanced of any in digital currency and it’s exciting to watch.”
‘Nothing like bitcoin or ethereum’
To be sure, Chorzempa said China’s digital yuan has very little in common with cryptocurrencies such as bitcoin, known for its high price volatility.
“I would say the safety levels (of the digital yuan are) very high and the risk is low,” he said. “It’s designed to have the same value as any regular renminbi, so there should be no price fluctuations to worry about.”
Intermediaries that sell the digital currency in China are also expected to be “quite safe and carefully regulated” so long as they are sanctioned by the government, Chorzempa said.
“I wouldn’t be too worried about the safety of a digital renminbi in a central bank regulated wallet,” he added.
Beyond China, Sweden is expected to be among the first advanced economies to launch a digital currency, according to the PIIE researcher.
Since Facebook first proposed launching the Libra cryptocurrency, now rebranded Diem, there has been a “huge wave of interest” among central banks that are concerned that a private tech company “might take over their currency” in a similar manner to how Alipay and WeChat pay dominate payments in China, he said.
“I expect central bank digital currencies to continue to expand around the world,” Chorzempa said.
— CNBC’s Evelyn Cheng contributed to this report.