Today, the People’s Bank of China (PBoC) has published a white paper on the e-CNY or digital yuan. For example, the former governor of the central bank had previously stated that state banks issued e-CNY against central bank deposits, an artificial CBDC. By the end of June, individuals had set up nearly 21 million wallets, and companies another 3.4 million wallets. A total of 34.5 billion yuan ($5.34 billion) was processed in 70.75 million transactions, with an average transaction value of 488 yuan ($75.47), which is less than half the average value in October of the previous year.

This article outlines the primary objectives of the digital yuan. The first goal is to ensure financial inclusion and provide a good public digital cash while the use of physical cash declines. Digital RMB assets do not earn interest. The second goal, promoting fair competition and interoperability between different forms of digital cash, is stated without referencing dominant mobile payment platforms like Alipay or WeChat Pay. This sets e-CNY apart from other digital payment tools, as it is legal tender, does not require a bank account, supports offline payments, and offers “managed anonymity.” This refers to the ability to set up low-value wallets using only a mobile phone number. As reported earlier, Chinese authorities currently have the ability to track payments. The third goal is cross-border payments. The central bank addresses concerns regarding the use of the RMB internationally by stating, “Internationalization of a currency is a natural outcome of market selection. A country’s international monetary status depends on its economic fundamentals, the depth, efficiency, and openness of its financial markets.” The report notes that while China’s markets have historically been closed, there is now a gradual opening.

The digital yuan, also known as e-CNY or e-RMB, is the digital version of the physical yuan. In simple terms, this digital currency is designed to replace physical banknotes and coins. The ultimate goal of China’s digital currency is to create a cashless system that can drive consumer, commercial, and government efficiency.

What is the Digital Yuan or White Yuan?

The digital yuan, or white yuan, is a form of central bank digital currency (CBDC) issued by the People’s Bank of China (PBoC). It allows China to digitize its physical banknotes and coins for cashless payments. Thus, the digital yuan is the digital version of the physical yuan. It is crucial to understand the subtle distinction between the Chinese yuan and renminbi.

  • Renminbi (RMB): The official currency of China.
  • Yuan: The primary unit of the renminbi. It is often used as a general term to refer to China’s currency in accounting for the country’s economic system.

In essence, this is a way for the central bank to digitize its circulating banknotes and coins. China’s market is already advanced in cashless payments, and the digital yuan will accelerate this process.

This legal tender in China will not accrue interest. “The use of cash is declining. Ultimately, cash will be replaced by something in digital form,” said Yan Xiao, head of the Digital Trade project at the World Economic Forum, to CNBC. This is one of the main drivers of this development.

How Does the Digital Yuan Work?

The digital yuan functions as a digital version of the physical yuan. Thus, China’s digital currency operates like banknotes and coins, but digitally. This means the digital yuan may eventually replace physical cash as a medium of payment. The People’s Bank of China (PBoC) distributes the digital yuan between Chinese banks, which must deposit an equal amount in central bank reserves to issue it to users. Users can then store their digital yuan in digital wallets and use QR codes for transactions.

Digital Yuan vs. Cryptocurrencies

Unlike cryptocurrencies such as Bitcoin (BTC-USD), the digital yuan is not an alternative currency, and transactions are not entirely anonymous. It is designed to be used as legal tender in China. As such, it will directly compete with businesses reliant on mobile payment systems in China.

Digital Yuan Testing

China’s digital currency entered its initial trial phase in 2020. Extensive testing programs took place throughout 2021 and continued into 2022. Depending on the success of these trials and the time needed to fix potential issues in the system, the digital yuan is expected to be officially launched in 2023 or 2024. These trials began in several cities, including Xiong’an, Shenzhen, Suzhou, and Chengdu, with plans for other major cities like Beijing, Tianjin, Hebei Province, Hong Kong, and Macau.

Pros and Cons of the Digital Yuan

Pros of e-CNY:

  • Consumer efficiency: Consumers can use a single digital currency instead of multiple apps for various functions like transportation and business transactions.
  • Consumer savings: A digital yuan could reduce or eliminate transaction fees for consumers, such as those charged by business apps.
  • High-quality data collection: By tracking digital transactions, the PBoC can more effectively gather economic data and calculate statistics.
  • Crime detection and prevention: The ability to monitor transactions can help prevent counterfeiting or illegal fund flows such as terrorism financing and money laundering.

Cons of e-CNY:

  • Lack of anonymity: Unlike common cryptocurrencies, the digital yuan will not be anonymous because the central bank and the Chinese government will be able to monitor transactions.
  • Increased competition: While this may benefit the Chinese government, mobile payment companies like Alibaba (BABA) and Tencent (TCEHY) could face threats to their digital payment services.

How to Invest in the Digital Yuan

The digital yuan is not available for non-Chinese citizens, and investors cannot buy or trade it directly. Since the digital yuan is merely a digital version of the physical yuan, there are indirect ways for investors to invest in China’s digital currency. For example, investors may buy physical yuan directly and hold it in cash, invest in yuan futures contracts, or purchase exchange-traded funds (ETFs) designed to track the Chinese yuan.

Why is it Being Introduced?

Fan Yifei, Deputy Governor of PBoC, stated last year that “there is an urgent need to digitize cash and coins” because their production and storage are currently inefficient. In an article in the government publication Yicai Global, Fan explained that cash and coins are difficult to manage, prone to counterfeiting, and can be used for illegal purposes due to their anonymity. The PBoC sees several advantages in the digital yuan.

In a separate article, Fan outlined how a CBDC could improve payment efficiency and enhance monetary policy transmission. He also argued that a digital yuan could contribute to financial stability through “controlled anonymity”—payments will be somewhat anonymous, but data analytics tools could help the central bank identify illegal activities. Another reason behind PBoC’s push could be increasing competition in the payment space and reducing systemic risk. The digital payments sector in China is dominated by Alipay (operated by Alibaba’s Ant Group) and WeChat Pay (operated by Tencent). “The existing system is controlled by private companies,” said Linghao Bao, an analyst at Trivium China. “If Alipay or WeChat Pay were to go bankrupt, which is unlikely, it could create systemic risk. The biggest reason for PBoC’s move is to level the playing field.”

How Will the Digital Yuan Work?

There are two key aspects to this: distribution and eventual spending. Distribution will be done through a so-called two-layer system. The PBoC will distribute the digital yuan to commercial banks, which will then be responsible for delivering it to consumers. This could include services that allow consumers to exchange their coins and cash for digital yuan.

China has already distributed millions of digital yuan in real-world trials in several cities, including Shenzhen, Chengdu, and Suzhou. These trials include distributing a specific amount of yuan via lottery. Users must typically download a separate app to participate. JD.com, one of China’s largest e-commerce players, participated in this trial and allowed customers to buy items with the digital yuan.

At this stage, it is unclear how users will store and spend digital yuan once it is rolled out nationwide. The most common mobile payment method in China relies on QR codes. Users can display these barcodes in the Alipay or WeChat Pay apps, and merchants scan them. Xiao from the WEF believes commercial banks will likely integrate similar functions into their apps. Alipay and WeChat Pay could also allocate part of their platforms to the digital yuan. Meanwhile, smartphone manufacturers could create digital yuan wallets for their devices. Xiao also mentioned that commercial banks already have the infrastructure to distribute digital yuan and that it is better to have them do this rather than the central bank.

Is the Digital Yuan Designed to Compete with Tech Giants?

In some cases, the digital yuan is designed to increase competition with Alipay and WeChat Pay, but it is not intended to completely replace them. Bao from Trivium China said, “I don’t see the digital yuan as a direct competitor to Alipay or WeChat Pay; rather, it’s a new platform that allows other players to enter and compete with WeChat and Alipay. These could be commercial banks or other payment companies.” PBoC advocates also noted that the proposed two-layer model would prevent the central bank from competing with commercial banks.

Is the Digital Yuan Like Bitcoin?

No. Bitcoin is a decentralized cryptocurrency, meaning it is not controlled by any central authority like a central bank. Bitcoin is also built on a technology called blockchain, which the digital yuan does not use, at least not yet. Bitcoin advocates also promote the anonymity of digital currencies. PBoC supporters stated that the digital yuan will have “controlled anonymity,” where users of digital yuan wallets will have their transactions revealed to the PBoC, the “sole third party.” Users will have “weak account linkage,” meaning their current bank accounts may not necessarily be tied to their digital yuan accounts.

According to Xiao from WEF, the digital yuan could be based on a phone number. PBoC also stated that agencies offering digital yuan services must “asynchronously send transaction data to the central bank in a timely manner.” This would allow the PBoC to track “essential data” to combat money laundering and criminal activity. Some commentators have raised concerns that the digital yuan could be used to increase surveillance of citizens.

RMB Internationalization

China has been pushing to internationalize the yuan, and some commentators see the digital yuan as a way to achieve this. However, for now, the digital currency is focused domestically, and according to Bao from Trivium China, international use is “not an immediate priority.” Nonetheless, the PBoC has begun efforts to use the digital yuan for cross-border transactions. Last month, the PBoC joined central banks from Thailand, the UAE, and Hong Kong to explore a cross-border digital currency payment project.

Final Thoughts

You can send yuan (CNY) to family and friends in China through a remittance service by transferring it to their bank accounts. If you need help with imports from China, air and sea shipping, customs clearance, and remitting yuan to China, you can instantly send yuan (CNY) to China through EasyTrade’s website.