Will China’s Digital Currency Be the Next Big Global Financial Technology?

What if money could instantly and directly reach the people who use it? No banks, no delays, and no fees. People could send each other money without having to go through Venmo or Cash App, paychecks could clear instantly instead of counting business days, and loans could be approved with no waiting period.

China has already taken the first steps toward this goal of convenience and efficiency with the government’s recent rollout of its digital currency. The Digital Yuan is a digital format of the Chinese national currency that operates as legal tender issued by the People’s Bank of China (PBOC) and is used chiefly through mobile technology.

With domestic pilot programs sending small trial amounts to individuals in a handful of major Chinese cities in recent months, propagation abroad would not be difficult to envision. We may be witnessing the emergence of a new species of currency incubated in the modern financial technology ecosystem and ripe for international adoption.

The Legacy and the Novel

With cryptocurrencies gaining popularity in recent years, societies have stumbled into a completely new slew of financial literacy challenges surrounding decentralized and unregulated digital assets. Those assets now exist side by side with traditional financial instruments.

With the ease of use and efficiency associated with non-state cryptocurrencies tethered to the foundational basis of the state fiat currency, a central bank digital currency (CBDC) blurs the line between the old and the new to discover the boundaries in hopes of subsuming cryptocurrency and its related functions into the sphere of sovereign state of control.

The legacy format for the traditional financial system relies on the interplay between the central bank, commercial banks, and individuals and businesses in order to withdraw and deposit funds, take out loans and transfer money.

In a U.S. dollar-dominated global reserve system, most of the world’s central bank foreign exchange reserves are held in the U.S. dollar to the tune of 60% while China’s Renminbi comprises hovers around 2% in comparison. The U.S. currency dominates international trade with the majority of all the value of international transactions settled in the U.S. dollar.

Both levels of the financial system run into issues during economic shocks. In both the Great Financial Crisis as well as during the start of COVID-19, liquidity at commercial banks all across the world seized up as uncertainty and volatility gripped the global economy. Banks tightened lending as profit/loss considerations kicked in.

Features of the Digital Yuan

As a CBDC, the Digital Yuan can negate the need for commercial banks as intermediaries entirely. Not only is the PBOC the issuer of the currency, but it would also form an unhindered relationship between buyer and seller through direct monetary transfers as seen in the recent pilot programs.

The PBOC can also harness discretion in managing oversight into the transactions, velocity and supply of money, inflation, and spending habits among other indicators, a flexible money supply as a central bank issuing fiat and conceivably take on the business of handling loans as it replaces the function of commercial banks.

With this insight, the PBOC and the Chinese government can achieve a staggering degree of insight for their goals both inside and outside of their borders.

Economic Pivot and International Adoption

While the U.S. has been running up its trade deficit by massively importing goods from abroad and getting mired in one expensive war after another, China has not deployed significant military force abroad, focusing heavily instead on production for exports and political-economic relations.

The Belt and Road Initiative (BRI) is the most significant of these efforts, establishing infrastructure and trade corridors across dozens of countries throughout Eurasia and Africa in addition to increased ties in Latin America. Most importantly, these efforts give China a significant stake and influence in the rapidly growing strength of the world’s emerging markets.

While developing economies around the world have reaped some of the benefits of the U.S. dollar reserve system through the years, it has also come with the burdens of that system described earlier as well as development issues such as local currency inflation and high-interest rate loans. At the same time, the U.S. has been on a money creation spree since February 2020 with the money supply hitting an increase of 26% on the year, adding to inflation concerns.

In addition to the allure of the ease of access, efficiency, stability, and potential for foreign direct investment of the Digital Yuan, its delivery and service through mobile technology creates an intuitive bridge for the large and growing young demographics in these emerging market societies that have rapidly adopted mobile phones and app-based services.

Imagine an internationalization scenario whereby Chinese nationals abroad begin to transact with one another using Digital Yuan as they have done already with their existing fintech applications. The expansion in eligibility of the PBOC mobile app and Digital Yuan functionality to the populations and firms in emerging market societies would amplify the network effect of the Digital Yuan as transactions take place seamlessly between parties and value is held in virtual wallets on mobile devices.

Employers could pay workers in the Digital Yuan, home loans could be extended, and friends could split a bill at a restaurant as more users download the platform to transact. Those ‘unbanked’ in the world will not have to experience being ‘banked’ at all. At a certain point, there could be a user base large enough to push the Digital Yuan to possible global adoption at scale.

While many observers are sounding alarm bells over questions of solvency, the viability of implementation, or disaster for the liberal world order, it may be useful to be mindful first of its potential as a disruptive financial technology. Just as remote banking services replaced the need for physical banks, or Bitcoin threw a new asset class into the investing market, the Digital Yuan has the potential to replace important aspects of the world’s existing financial and monetary order.


  • Weimin Chen

    Weimin Chen has been a research assistant and contributor at the Austrian Economics Center. His work has also been featured at the Mises Institute, Antiwar.com, and the Scott Horton Show.

    View all posts

The views expressed on austriancenter.com are not necessarily those of the Austrian Economics Center.

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