OPINION – A Pan-Asian Digital Currency would bring many opportunities to China

*By Oriol Caudevilla

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In mid-October, three Japanese scholars and advisors (Taiji Inui, Wataru Takahashi and Mamoru Ishida) published an article in VoxEU (a publication set up by the Centre for Economic Policy and Research, CEPR) in which they advocated the introduction of an Asian digital common currency covering the whole of the East Asia region as a multilateral synthetic currency comparable to the euro.

According to the authors, the benefits it would bring (deepening cooperation within multilateral frameworks and the protection of the rights of small and medium-sized countries, among others) would be greater than the disadvantages of inefficiencies in multilateral frameworks. The background for this research was the rise of Central Bank Digital Currencies (CBDCs) throughout the world, and more notably in Asia.

Even though this is just a suggestion made by the authors, which we do not know whether it will be put in practice or not, it is interesting to see that so much research is being conducted in Asia in the area of CBDCs. This is an area which offers indeed countless possibilities to China, as we are already seeing through the digital yuan tests in the Mainland (and soon in HK and Macau) and through the many possibilities, the RCEP trade agreement will offer to the cross-border deployment of the digital yuan.

In my latest articles, I have been writing quite often about China´s new Digital Yuan and its tests in the Greater Bay Area (GBA), most notably in Hong Kong and Macau. The Digital Yuan, which is China´s Central Bank Digital Currency (CBDC) and is also known as DCEP (Digital Currency Electronic Payment), offers indeed a myriad of opportunities to the whole of China and to the Greater Bay Area.

As I said, a Central Bank Digital Currency (CBDC) is a new form of Central Bank money accessible to the general public, accepted as a means of payment, legal tender, safe store of value by all citizens, businesses and government agencies.

China´s rationale behind its DCEP is multiple: monetary and social policy, technology and innovation, global geopolitics, financial crime prevention… Besides, we must not forget that CBDCs can be an effective tool when promoting financial inclusion, since they can address the needs of unbanked and underbanked people.

I also mentioned that Hong Kong, as the largest offshore yuan trading center and a crucial part of the Guangdong-Hong Kong-Macau Greater Bay Area, will be a good case study for the use of the Digital Yuan for cross-border transactions, and Macau will be so as well. It is in China´s interest not only to make the Digital Yuan become an effective domestic tool for facilitating consumers´ retail payments, but also to enhance the yuan as a payments currency in the global financial system. 

In this regard, aside from its domestic use cases for its DCEP, the free trade area created by the Regional Comprehensive Economic Partnership (RCEP), alongside the Belt and Road Initiative, will undoubtedly be a big market for the cross-border adoption of China´s digital yuan.

However, there is a related topic about which I have not written much yet, and this topic may become very relevant in the near future as well: China´s plans to create a pan-Asian digital currency.

At a meeting of the Chinese People’s Political Consultative Conference, a political advisory body, at the Great Hall of the People in Beijing last May 21, 10 members proposed a plan to create a digital currency consisting of the Chinese yuan, Japanese yen, South Korean won and Hong Kong dollar.

These 10 members included influential figures such as Neil Shen, co-founder of Ctrip, as well as founding and managing partner of Sequoia China and a member of China’s upper house; Henry Tang, a Hong Kong politician who served as the Chief Secretary of Hong Kong (the Special Administrative Region’s second-highest position) from 2007 to 2011, among others.

It was in line with the proposal made by former Hong Kong Monetary Authority chief executive Norman Chan Tak-lam, who, a few weeks before, in mid-April, had already suggested the creation of a new regional digital currency based on a basket consisting of these four currencies.

The proposal described the currency as a “stablecoin”, a term for cryptocurrencies designed to hold their value and backed by a reserve currency. According to the proponents, the stablecoin would help facilitate trade among the four countries, which is key to economic recovery in the region after coronavirus. The plan also suggested creating a regulatory sandbox and scaling up the system in Hong Kong over time to improve cross-border payment services between the four countries. 

There has not been much news regarding this proposal since last June, but, if eventually deployed, this would undoubtedly bring many opportunities to China. 

To sum up, even though I have mentioned in my article several initiatives related to CBDCs, the fact is that all these ideas and initiatives are intertwined: since it is in China´s interest not only to make the Digital Yuan become an effective domestic tool for facilitating consumers’ retail payments, but also to enhance the yuan as a payments currency in the global financial system, RCEP will allow China to be able to leverage the agreement to facilitate the cross-border adoption of its digital yuan and to start slowly challenging the global dominance of the US dollar.

Aside from that, the proposed stablecoin consisting of the yuan, yen, won and HK dollar, if eventually deployed, would also be of big help when  taking some of the USD-denominated exports and convert them into yuan-based exports, thus challenging the global domination of the USD.

The author works as a FinTech Advisor and Researcher. He holds an MBA and a doctorate in Hong Kong real estate law and economics. He has worked as a business analyst for a Hong Kong publicly listed company and he has given seminars at HKU on Shadow Banking in China and at several universities in Macau on China´s new digital yuan. He is currently a member of the Blockchain, Digital Banking and Greater Bay Area Committees at the Fintech Association of Hong Kong (FTAHK).