China Creates Its Own Digital Currency, a First for Major Economy
A cyber yuan stands to give Beijing power to track spending in real-time.
A cyber yuan stands to give Beijing power to track spending in real-time.
A thousand years ago, when money meant coins, China invented paper currency. Now the Chinese government is minting cash digitally, in a re-imagination of money that could shake a pillar of American power.
It might seem money is already virtual, as credit cards and payment apps such as Apple Pay in the U.S. and WeChat in China eliminate the need for bills or coins. But those are just ways to move money electronically. China is turning legal tender itself into computer code.
Cryptocurrencies such as bitcoin have foreshadowed a potential digital future for money, though they exist outside the traditional global financial system and aren’t legal tender like cash issued by governments.
China’s version of a digital currency is controlled by its central bank, which will issue the new electronic money. It is expected to give China’s government vast new tools to monitor both its economy and its people. By design, the digital yuan will negate one of bitcoin’s major draws: anonymity for the user.
Beijing is also positioning the digital yuan for international use and designing it to be untethered to the global financial system, where the U.S. dollar has been king since World War II. China is embracing digitization in many forms, including money, in a bid to gain more centralized control while getting a head start on technologies of the future that it regards as up for grabs.
“In order to protect our currency sovereignty and legal currency status, we have to plan ahead,” said Mu Changchun, who is shepherding the project at the People’s Bank of China.
Digitized money could reorder the fundamentals of finance the way Amazon.com Inc. disrupted retailing and Uber Technologies Inc. rattled taxi systems.
That an authoritarian state and U.S. rival has taken the lead to introduce a national digital currency is propelling what was once a wonky topic for cryptocurrency theorists into a point of anxiety in Washington.
Asked in recent weeks how digitized national currencies such as China’s might affect the dollar, Treasury Secretary Janet Yellen and Federal Reserve Chairman Jerome Powell have said the issue is being studied in earnest, including whether a digital dollar makes sense someday.
The dollar has faced challengers before—the euro, to name one—only to grow more important when rivals’ shortcomings became apparent. The dollar far outstrips all other currencies for use in international foreign-exchange trades, at 88% in the latest rankings from the Bank for International Settlements. The yuan was used in just 4%.
Digitization wouldn’t by itself make the yuan a rival for the dollar in bank-to-bank wire transfers, analysts and economists say. But in its new incarnation, the yuan, also known as the renminbi, could gain traction on the margins of the international financial system.
It would provide options for people in poor countries to transfer money internationally. Even limited international usage could soften the bite of U.S. sanctions, which increasingly are used against Chinese companies or individuals.
Josh Lipsky, a former International Monetary Fund staffer now at the Atlantic Council think tank, said, “Anything that threatens the dollar is a national-security issue. This threatens the dollar over the long term.”
The digital yuan resides in cyberspace, available on the owner’s mobile phone—or on a card for the less tech-savvy—and spending it doesn’t strictly require an online connection. It appears on a screen with a silhouette of Mao Zedong, looking just like the paper money.
In tests in recent months, more than 100,000 people in China have downloaded a mobile-phone app from the central bank enabling them to spend small government handouts of digital cash with merchants, including Chinese outlets of Starbucks and McDonald’s.
“It’s pretty good,” said Tao Wei, a young woman in Beijing, after spending a test allotment. It took her just an instant to pay for her two-year-old daughter’s birthday portrait by pointing her iPhone toward a scanner. The Chinese Communist Party has also let members settle monthly dues with digital yuan.
China has indicated the digital yuan will circulate alongside bills and coins for some time. Bankers and other analysts say Beijing aims to digitize all of its money eventually. Beijing hasn’t addressed that.
Digitized money looks like a potential macroeconomic dream tool for the issuing government, usable to track people’s spending in real time, speed relief to disaster victims or flag criminal activity. With it, Beijing stands to gain vast new powers to tighten President Xi Jinping’s authoritarian rule.
Elements of this kind of control already exist in China, as digital payments have become the norm. Mr. Mu has said the central bank will limit how it tracks individuals, in what he calls “controllable anonymity.”
The money itself is programmable. Beijing has tested expiration dates to encourage users to spend it quickly, for times when the economy needs a jump start.
It’s also trackable, adding another tool to China’s heavy state surveillance. The government deploys hundreds of millions of facial-recognition cameras to monitor its population, sometimes using them to levy fines for activities such as jaywalking. A digital currency would make it possible to both mete out and collect fines as soon as an infraction was detected.
A burst of cash-accumulation in China last year indicates residents’ concern about the central bank’s eye on every transaction. Song Ke, a finance professor at Renmin University in Beijing, told a recent conference that China’s measure of yuan in circulation, or cash, popped up 10% in 2020.
What about volatility? Cryptocurrencies such as bitcoin are famous for that. But the People’s Bank of China will strictly control the digital yuan to ensure there aren’t valuation differences between it and the paper bills and coins.
That means it won’t make sense for investors and traders to speculate in the digital yuan as some do with cryptocurrencies. Anti-counterfeiting measures will be designed to make it impossible for anyone besides the People’s Bank of China to create new digital yuan.
While China hasn’t published final legislation for the program, the central bank says it may initially impose limits on how much digital yuan individuals can keep on their person, as a way to control how it circulates and provide users a dose of security and privacy.
China’s central bank won’t use the new technology as a way to get more money into circulation, since every yuan issued digitally will essentially cancel one yuan circulating in physical form.
When bitcoin launched in 2009, most nations’ policy makers largely played down its significance. China paid attention.
Always hypervigilant to threats, the leadership feared that a cryptocurrency could undermine government power if people began using it in earnest. Zhou Xiaochuan, China’s top central banker from 2002 to 2018, has said bitcoin both dazzled and frightened him. In 2014, he launched a formal study for a possible Chinese digital currency.
China hardly looked like a currency pioneer. Its strict government control of the yuan, for instance, ran counter to the rip-roaring trade in other major currencies.
At the same time, a financial-technology revolution was under way in China, with the frenetic adoption of the AliPay and WeChat apps making cash mostly unneeded, and turbocharging startup companies with ways to pay on the go.
Then, in mid-2019, Facebook Inc. said it would pursue its own cryptocurrency. The realization this could circulate in a user base far bigger than any national population brought immediate recognition that technology could upend traditional currencies.
While U.S. regulators focused on stopping Facebook, ultimately succeeding, China accelerated its pursuit of a digitized yuan, launching trials in April 2020.
Suddenly, China’s money moves bore watching. Central bankers from the U.S. and other Western economies fret that what Facebook planned with a digital currency could now be done by China, a powerful government.
“There is a sort of Uber fear,” said a senior European central banker who has spoken to Western counterparts, referring to stress on taxi systems when the ride-hailing company arrived in cities around the world. “You don’t want another country’s currency circulating among your citizens,” the banker said.
The U.S., as the issuer of dollars that the world’s more than 21,000 banks need to do business, has long demanded insight into major cross-border currency movements. This gives Washington the ability to freeze individuals and institutions out of the global financial system by barring banks from doing transactions with them, a practice criticized as “dollar weaponization.”
American sanctions on North Korea and Iran for nuclear programs hobble their economies. Swiss banks abandoned their famous secrecy eight years ago to avoid Washington’s wrath in a showdown over taxes. After the February coup in Myanmar, the U.S. used sanctions to block the movement of top military officials’ financial assets through banks. The Treasury’s database of sanctioned individuals and firms—the “Specially Designated Nationals and Blocked Persons List”—touches virtually every nation on earth.
Beijing is especially discomfited by a fast-expanding part of the sanctions register: more than 250 Chinese names, including politicians the U.S. accuses of atrocities against ethnic minorities or of curtailing freedoms in Hong Kong. Sanctions left Carrie Lam, China’s top official in Hong Kong, with a stockpile of cash in her home because banks feared that accepting her business would risk exposing them, too, to an American freeze.
The digital yuan could give those the U.S. seeks to penalize a way to exchange money without U.S. knowledge. Exchanges wouldn’t need to use SWIFT, the messaging network that is used in money transfers between commercial banks and that can be monitored by the U.S. government.
The chance to weaken the power of American sanctions is central to Beijing’s marketing of the digital yuan and to its efforts to internationalize the yuan more generally. Speaking at a forum last month, China’s Mr. Mu, the central bank official, repeatedly said the digital yuan is aimed at protecting China’s “monetary sovereignty,” including by offsetting global use of the dollar.
In a 2019 war game at Harvard University, veteran U.S. policy makers scrambled to craft a response to a nuclear-missile development by North Korea secretly funded with digital yuan. Because of the currency’s power to undercut sanctions, the participants, including several who are now in the Biden administration, deemed it more threatening than the warhead.
Nicholas Burns, a longtime American diplomat and favorite to be ambassador in Beijing, told the group, “The Chinese have created a problem for us by taking away our sanctions leverage.”
As China’s marketing for the digital yuan kicks into high gear, an English-language animation circulated online by state broadcaster CGTN shows a man in an American-flag shirt knocked out by a golden coin depicting digital yuan.
“This is one of the building blocks of China’s move toward world market status and greater involvement in setting the framework of the global economy,” the narrator says.
Initially, the digital yuan won’t change significantly how money circulates through China’s financial system. Under the central bank’s direction, the six biggest commercial banks—all government-owned—will distribute digital yuan to smaller banks and to app providers AliPay and WeChat, which are expected to manage sender-recipient interactions.
Unlike electronic transactions today, the digital yuan is designed to move from A to B instantaneously, at least in theory removing a way banks and financial apps profit off fees and brief built-in delays in such handoffs. The only necessary middleman is the central bank. Mr. Mu has said the digital yuan, because it is state-backed, will reduce risks to the financial system posed by China’s dominant payment platforms that are private companies.
When a global TV audience turns its attention to skaters and bobsledders in Beijing’s Winter Olympics next February, authorities are expected to give visiting athletes digital yuan to spend while they are in the spotlight, an indication of ambitions that stretch beyond China’s shores.
Beijing has joined an initiative to develop protocols for the cross-border use of digital currencies, working with the Bank for International Settlements and the central banks of Hong Kong, Thailand and the United Arab Emirates.
China’s digital strides draw attention to how the U.S. needs to modernize its own financial infrastructure, according to Kevin Warsh, a former Fed governor now at Stanford University’s Hoover Institution. “If we wait 5 or 10 years, we may well end up with some very bad policy choices,” he said.
More than 60 countries are at some stage of studying or developing a digital currency, according to research group CBDC Tracker. Digital currencies hold some of their biggest potential for the 1.7 billion people globally who the World Bank says lack a bank account. The Bahamas has already issued a digital currency to address financially underserved populations. Some central banks say such currencies would come in handy for families of migrant laborers who make tiny fund transfers that are cumbersome and expensive.
The senior European central banker noted that international person-to-person money transfers can take days and worried that speed and efficiency could eventually make the digital yuan a preferred currency for remittances as countries deepen financial ties with China.
China, with a working model, is offering a ready way for managing digital cash. President Xi last year called for China to seize opportunities to set international rules for digital currencies, much as Beijing has sought to influence and dominate an array of advanced-technology standards such as for 5G telecommunications, driverless cars and facial recognition.
Asked during a recent Senate appearance whether the dollar could be digitized to help the U.S. defend its supremacy, the Fed’s Mr. Powell said researching that question is a “very high-priority project.”
“We don’t need to be the first,” he said. “We need to get it right.”
Reprinted by permission of The Wall Street Journal, Copyright 2021 Dow Jones & Company. Inc. All Rights Reserved Worldwide. Original date of publication: April 5, 2021.
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Multinationals like Starbucks and Marriott are taking a hard look at their Chinese operations—and tempering their outlooks.
For years, global companies showcased their Chinese operations as a source of robust growth. A burgeoning middle class, a stream of people moving to cities, and the creation of new services to cater to them—along with the promise of the further opening of the world’s second-largest economy—drew companies eager to tap into the action.
Then Covid hit, isolating China from much of the world. Chinese leader Xi Jinping tightened control of the economy, and U.S.-China relations hit a nadir. After decades of rapid growth, China’s economy is stuck in a rut, with increasing concerns about what will drive the next phase of its growth.
Though Chinese officials have acknowledged the sputtering economy, they have been reluctant to take more than incremental steps to reverse the trend. Making matters worse, government crackdowns on internet companies and measures to burst the country’s property bubble left households and businesses scarred.
Now, multinational companies are taking a hard look at their Chinese operations and tempering their outlooks. Marriott International narrowed its global revenue per available room growth rate to 3% to 4%, citing continued weakness in China and expectations that demand could weaken further in the third quarter. Paris-based Kering , home to brands Gucci and Saint Laurent, posted a 22% decline in sales in the Asia-Pacific region, excluding Japan, in the first half amid weaker demand in Greater China, which includes Hong Kong and Macau.
Pricing pressure and deflation were common themes in quarterly results. Starbucks , which helped build a coffee culture in China over the past 25 years, described it as one of its most notable international challenges as it posted a 14% decline in sales from that business. As Chinese consumers reconsidered whether to spend money on Starbucks lattes, competitors such as Luckin Coffee increased pressure on the Seattle company. Starbucks executives said in their quarterly earnings call that “unprecedented store expansion” by rivals and a price war hurt profits and caused “significant disruptions” to the operating environment.
Executive anxiety extends beyond consumer companies. Elevator maker Otis Worldwide saw new-equipment orders in China fall by double digits in the second quarter, forcing it to cut its outlook for growth out of Asia. CEO Judy Marks told analysts on a quarterly earnings call that prices in China were down roughly 10% year over year, and she doesn’t see the pricing pressure abating. The company is turning to productivity improvements and cost cutting to blunt the hit.
Add in the uncertainty created by deteriorating U.S.-China relations, and many investors are steering clear. The iShares MSCI China exchange-traded fund has lost half its value since March 2021. Recovery attempts have been short-lived. undefined undefined And now some of those concerns are creeping into the U.S. market. “A decade ago China exposure [for a global company] was a way to add revenue growth to our portfolio,” says Margaret Vitrano, co-manager of large-cap growth strategies at ClearBridge Investments in New York. Today, she notes, “we now want to manage the risk of the China exposure.”
Vitrano expects improvement in 2025, but cautions it will be slow. Uncertainty over who will win the U.S. presidential election and the prospect of higher tariffs pose additional risks for global companies.
For now, China is inching along at roughly 5% economic growth—down from a peak of 14% in 2007 and an average of about 8% in the 10 years before the pandemic. Chinese consumers hit by job losses and continued declines in property values are rethinking spending habits. Businesses worried about policy uncertainty are reluctant to invest and hire.
The trouble goes beyond frugal consumers. Xi is changing the economy’s growth model, relying less on the infrastructure and real estate market that fueled earlier growth. That means investing aggressively in manufacturing and exports as China looks to become more self-reliant and guard against geopolitical tensions.
The shift is hurting western multinationals, with deflationary forces amid burgeoning production capacity. “We have seen the investment community mark down expectations for these companies because they will have to change tack with lower-cost products and services,” says Joseph Quinlan, head of market strategy for the chief investment office at Merrill and Bank of America Private Bank.
Another challenge for multinationals outside of China is stiffened competition as Chinese companies innovate and expand—often with the backing of the government. Local rivals are upping the ante across sectors by building on their knowledge of local consumer preferences and the ability to produce higher-quality products.
Some global multinationals are having a hard time keeping up with homegrown innovation. Auto makers including General Motors have seen sales tumble and struggled to turn profitable as Chinese car shoppers increasingly opt for electric vehicles from BYD or NIO that are similar in price to internal-combustion-engine cars from foreign auto makers.
“China’s electric-vehicle makers have by leaps and bounds surpassed the capabilities of foreign brands who have a tie to the profit pool of internal combustible engines that they don’t want to disrupt,” says Christine Phillpotts, a fund manager for Ariel Investments’ emerging markets strategies.
Chinese companies are often faster than global rivals to market with new products or tweaks. “The cycle can be half of what it is for a global multinational with subsidiaries that need to check with headquarters, do an analysis, and then refresh,” Phillpotts says.
For many companies and investors, next year remains a question mark. Ashland CEO Guillermo Novo said in an August call with analysts that the chemical company was seeing a “big change” in China, with activity slowing and competition on pricing becoming more aggressive. The company, he said, was still trying to grasp the repercussions as it has created uncertainty in its 2025 outlook.
Few companies are giving up. Executives at big global consumer and retail companies show no signs of reducing investment, with most still describing China as a long-term growth market, says Dana Telsey, CEO of Telsey Advisory Group.
Starbucks executives described the long-term opportunity as “significant,” with higher growth and margin opportunities in the future as China’s population continues to move from rural to suburban areas. But they also noted that their approach is evolving and they are in the early stages of exploring strategic partnerships.
Walmart sold its stake in August in Chinese e-commerce giant JD.com for $3.6 billion after an eight-year noncompete agreement expired. Analysts expect it to pump the money into its own Sam’s Club and Walmart China operation, which have benefited from the trend toward trading down in China.
“The story isn’t over for the global companies,” Phillpotts says. “It just means the effort and investment will be greater to compete.”
Corrections & Amplifications
Joseph Quinlan is head of market strategy for the chief investment office at Merrill and Bank of America Private Bank. An earlier version of this article incorrectly used his old title.