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Market News China’s digital yuan stands out in cross-border pilot in a show of global ambition

China’s digital yuan stands out in cross-border pilot in a show of global ambition

According to a study, China's digital yuan took center stage in the biggest cross-border central bank digital currency (CBDC) experiment ever conducted

Micheli Carneiro
2022-10-28
229

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According to a study, China's digital yuan took center stage in the biggest cross-border central bank digital currency (CBDC) experiment ever conducted, demonstrating how Beijing is accelerating yuan internationalization efforts in the face of escalating geopolitical tensions.


According to a source, the world's biggest cross-border central bank digital currency (CBDC) experiment to far included China's digital yuan prominently, demonstrating how Beijing is accelerating yuan internationalization efforts despite mounting geopolitical concerns.


In the $22 million pilot that employed CBDCs to settle international transactions, China's digital currency, or e-CNY, was the most issued and frequently traded token, according to a Bank of International Settlement (BIS) study.


The m-Bridge initiative, which is testing cross-border payments in digital currencies issued by the central banks of China, Hong Kong, Thailand, and the United Arab Emirates, included a six-week test that finished late last month.


The large-scale testing's successful conclusion coincides with growing tensions throughout the world.


According to G. Bin Zhao, senior economist at PwC China, "many nations throughout the globe, including China, are afraid of U.S. financial penalties."


He said that the e-CNY offers a shortcut and stated, "This creates a historic opening for China to push yuan internationalization while the U.S. weaponizes the currency."


As a result of Russia's February invasion of Ukraine, which Moscow has referred to as "special operations," the West expelled Russia from the currency system.


Chinese President Xi Jinping promised "reunification" with Taiwan at the recently concluded Communist Party Congress, asserting that China did not "renounce the use of force."


Washington has warned Beijing that should it act against Taiwan's self-rule, the penalties it coordinated on Russia should serve as a warning as to what to anticipate.


Shuang Ding, head economist for Greater China and North Asia at Standard Chartered (HK) Ltd., said that RMB internationalization has become more of a need than a luxury to maintain economic and financial stability due to the perceived threat from the U.S.


According to the most recent statistics, a yuan internationalization tracker created by Standard Chartered reached a record high in July due to a robust issuance of bonds denominated in yuan in Hong Kong.


The PBOC upgraded a currency exchange facility with Hong Kong to a permanent arrangement in July, and China agreed to establish a yuan clearing center in Kazakhstan in September, both actions aimed at promoting the usage of the yuan globally.


Since the imposition of the western sanctions, the usage of the yuan in international transactions has increased in Russia, and an increasing number of Russian businesses, including Rosneft, Rusal, and Polyus, have issued yuan bonds.

WORLDWIDE AMBITION

China is accelerating domestic trial programs, mostly for retail payments, and is leading the worldwide race to create CBDCs.


The PBOC's involvement in m-Bridge demonstrates its desire to ultimately encourage widespread usage of the e-CNY worldwide.


Between August 15 and September 23, a total of 72 payment and foreign exchange transactions involving 11.8 million yuan ($1.64 million) or e-CNY were made, significantly more than with the other three currencies combined.


In the pilot, the top five state-owned banks in China, including Bank of China and China Construction Bank, settled the CBDCs on behalf of their corporate customers.


Given the country's significant proportion of regional commerce, the comparatively large number of e-CNY issuances "may represent increasing demand for yuan-denominated transactions," the BIS Innovation Hub Hong Kong Centre said in the research.

HEADWINDS

The BIS innovation centre and the four collaborating central banks together launched the m-Bridge initiative, which ultimately intends to develop a shared platform for effective, affordable digital payment to support international commerce.


However, whether it be digital or not, China's currency internationalization is hampered by a slowing economy, COVID flare-ups, and a problem of real estate debt.


At the end of the day, Zhao of PwC stated, "China's national power is the determining element, whether it's the e-CNY or the yuan."


Only if China's sound economic progress is endorsed will the yuan or e-CNY be broadly embraced.


The weakening yuan, which has fallen nearly 12% versus the US currency this year, is another obstacle.


According to Ding of Standard Chartered, "sustained devaluation owing to deteriorating fundamentals might impair faith in the currency."


According to SWIFT, the international financial messaging system, the yuan's percentage of global payments has increased for five months in a row but has remained low, standing at 2.44% in September, against 35.2% for the euro and 42.3% for the U.S. dollar.

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