China expands its Digital Yuan testing to Hong Kong and Macau

In past years, China has understood very well that to become and stay a technology powerhouse, it needs to remain at the forefront of new technologies.

In past years, China has understood very well that to become and stay a technology powerhouse, it needs to remain at the forefront of new technologies. Blockchain is one of the main examples of that: Beijing is encouraging Chinese companies to seize the opportunity offered by blockchain technology, while it is adopting a tough approach on virtual-currency trading platforms.

Therefore, Beijing is creating its ownworld-leading and government-ruled digital currency while trying to maintain control over the types of digital or cryptocurrencies traded within China.

In April, after several years of work (theresearch started in 2014), the Chinese Government announced the starting of thetests of the country´s central bank digital currency (CBDC), DCEP, in fourmajor cities (Shenzhen, Suzhou, Chengdu and Xiong’an), not with standing the COVID-19 crisis. China seeks to have its planned sovereign digital currency ready in time for the 2022 Winter Olympics in Beijing.

DCEP stands for "Digital Currency Electronic Payment" and it has been introduced by the People's Bank of China (PBOC). PBOC’s development was aided by the country’s four biggest state-run banks, including Agricultural Bank of China, which made the digital wallet app. 

The digital yuan is structured on a two-tier monetary system: (1) a central bank-issued digital currency for commercial banks, and (2) a commercial bank-issued digital currency focused on the publicand it is intended to replace some of China’s monetary base, or cash incirculation.

This State-ruled digital currency will have two main advantages. First, it will allow China to create a very powerful soft-power tool; secondly, it will allow China to fight its shadow banking system. Shadow banking in China was tolerated by the authorities as a way of meeting the funding needs of private companies and small and medium-sized enterprises, but, because of its rapid growth and increase in debt, the mainland authority has closed thousands of peer-to-peer platforms. Besides, for the government, a digital yuan could eliminate moneyprinting costs. For commercial banks, DCEP could facilitate more money transactions with lower costs. For the public, DCEP could save them fromindirect transaction fees for interbank transfers.

While many central banks around the world are developing digital currencies (80% of central banks are currently engaged in work related to CBDCs, some of them at an early research stage, some of them at a much more advanced stage) , China appears to have the edge due to its advanced digital payments ecosystem. Already 83% of digital payments in China are made through mobile devices, compared with 17% through cash or bank cards.

China’s Ministry of Commerce announced on August 14 that a pilot run of the country’s (CBDC) will begin in several new areasvery soon.

These new areas will be:

  • Northern China, encompassing Beijing.
  • Tianjin and Hebei Province.
  • The city clusterin the Yangtze River Delta Region including Shanghai.
  • The Greater Bay Area (GBA), including Macau and Hong Kong.

It is not clear when these pilot programs will begin, but the policy design of the digital currency is expected to becompleted by the end of this year 2020, said the ministry, therefore we need toassume that the tests will start very soon.

The Guangdong-Hong Kong-Macau Greater Bay Area brings together the two special administrative regions of Hong Kong and Macau plus nine municipalities in the Guangdong province (Guangzhou, Shenzhen, Zhuhai, Foshan, Dongguan,Zhongshan, Jiangmen, Huizhou, and Zhaoqing).

It has a combined population of over 69 million people and a GDP of around US$1.5 trillion (comparable to that of the Tokyo Bay Area and the New York Metropolitan Area).

In this sense, He Xiaojun, Director of the Local Financial Supervision Administration Bureau of Guangdong Province, outlined that Guangdong will play a big role in the cross-border adoption of DCEP.

Guangdong will further encourage innovation, deepen business integration with Hong Kong and Macao in virtual banking and other aspects, break through data barriers, and innovate. The use of digital currency scenarios allows modern financial technology to better serve the construction and development of the entire Greater Bay Area.

In this sense, China wants to transform the Greater Bay Area into a thriving economic hub featuring the digital yuan asa major focus.

What will these tests imply for Hong Kong and Macau?

Macau could serve as a point of connection between Mainland China and some Portuguese-speaking countries in Africa for the usage of the DCEP, since it is committed to be the trade and commercial services platform between China and the Portuguese-speaking countries, as well as being part of the Guangdong - Hong Kong - Macau Greater Bay Area and the ‘Belt and Road’ initiative.

Besides, we must bear in mind that Macauis trying to diversify its economy by creating a new stock exchange, a NASDAQ-like market denominated in yuan, facilitating fundraising by technology companies from the Bay Area economic hub.

Regarding Hong Kong, the Special Administrative Region is and will remain one of the most important financialcenters in the world. In this sense, Hong Kong can play a key role when deploying DCEP, especially when it comes to cross-border payments (related to BRI projects, bilateral trade…) since Hong Kong's legal framework is internationally respected.

Furthermore, HK could leverage the Mainland's DCEP to create a regional digital currency: in thissense, former Hong Kong Monetary Authority Chief Executive Norman Chan Tak-Lam proposed in mid-April a new regional digital currency based on the Hong Kong dollar, the yuan, Japan's yen and South Korea's won.

China, Japan and South Korea are pushing for a trilateral free-trade agreement this year and that, according to Chan, would lay the groundwork for a regional digital currency, being reasonable to include the Hong Kong dollar into the currency basket, since the SAR is a major trading and financial hub inthe region.

This digital currency would be issued and redeemed against the four currencies according to a predetermined formula of calculating respective weights.

On top of that, DCEP could boost the Wealth Management Connect Scheme.

To sum up, if DCEP proves to be viable, it will imply a breakthrough: China will bethe first country having successfully implemented a State-run digital currency, allowing us to prepare ourselves for a more digital and convenient future,since many other countries will follow China's example and will start creating their own CBDCs. But, at the same time, DCEP offers many opportunities to Hong Kong, since a HK - Mainland China - Japan -South Korea regional digital currency could be created in order to diminish the inconvenience of cross-border payment for enterprises but also tackle the economic stagnation in east Asia, and also to Macau, given Macau's belonging to the Portuguese-speaking world.

Latest news