China’s digital currency could challenge Bitcoin and even the dollar

People in China are no strangers to digital payments—if anything, it’s easier to move around and shop in Shanghai or Beijing with an Alipay or WeChat Pay smartphone app than it is bearing a pocketbook filled with yuan notes. Now the Chinese government has begun a pilot program for an official digital version of its currency—with the likelihood of a bigger test at the Beijing Winter Olympics in 2022. Some observers think the virtual yuan could bolster the government’s power over the country’s financial system and one day maybe even shift the global balance of economic influence.

Most money that gets swapped around electronically is just credits and debits in accounts at different banks. China’s digital cash is designed to be an electronic version of a banknote, or a coin: it just lives in a digital wallet on a smartphone, rather than a physical wallet. Its value would be backed by the state. But virtual cash would be quicker and easier to use than the paper kind—and would also offer China’s authorities a degree of control never possible with physical money.

The program started small in April, with a limited rollout in the cities of Shenzhen, Suzhou, Chengdu, and Xiong’an—a new “smart” city in the making, southwest of Beijing, conceived by President Xi Jinping. Local media have reported that some of the money was distributed in the form of transport subsidies paid to individuals in Suzhou.

One thing authorities have to be careful about is that the digital currency doesn’t start crowding out other forms of money, such as bank deposits. Banks need those deposits to extend as credit to borrowers. The system would also potentially compete with two of China’s most successful tech giants, Alibaba Group Holding Ltd. and Tencent Holdings Ltd., which back Alipay and WeChat, respectively.

That might be part of the point. Payments for consumption using big tech companies’ mobile apps represent 16% of gross domestic product in China, compared with less than 1% in the U.S. and U.K. Policymakers have expressed some concern about too much of the country’s financial plumbing being in the hands of a few companies. “Those big tech companies bring to us a lot of challenges and financial risks,” People’s Bank of China Governor Yi Gang said during a conference last year. “You see: In this game, winners take all, so monopolies are a challenge.”

The rise of independent cryptocurrencies such as Bitcoin and Ether, meanwhile, have created the danger that a huge swath of economic activity will occur out of the view of policymakers. China, in recent years, has cracked down on the use of such coins but was quick to see some potential in the basic idea—as long as it had some control. China started studying issuance of its own digital unit as far back as 2014. “This has very strong political will behind it,” says Andrew Polk, co-founder and head of economic research at Trivium China, a Beijing-based consultant. “They see an opportunity of being a global leader here.”

While a digital currency is likely years away from a national rollout, China’s moves have triggered concern about a new threat to U.S. financial dominance.

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Source: China Is Making Cryptocurrency to Challenge Bitcoin and Dollar – Bloomberg