OPINION – The Digital Yuan tests in HK and Macau, a good case study for cross-border transactions

*By Oriol Caudevilla

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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.

Theoretically, a CBDC should enable cheap, secure and real-time transfer of value, be accessible without a bank account and be built on an open infrastructure to foster competition and innovation

The major economy leading the CBDC race in Asia (and in the whole world) is China. On August 14, China´s Ministry of Commerce announced that a pilot run of the country’s CBDC, the DCEP (Digital Currency Electronic Payment) or Digital Yuan, would begin in several new areas soon, the Greater Bay Area (GBA) among them, including the two Special Administrative Regions of Hong Kong and Macau. However, it was not specified when these tests would start.

This second phase of testing comes just a few months after the initial phase, which started in April, when, after several years of work (the research commenced in 2014), the Chinese Government announced that the digital yuan tests would start in four major cities (Shenzhen, Suzhou, Chengdu and Xiong’an), notwithstanding the COVID-19 crisis.

When will these tests actually start in Hong Kong, though? 

Recently, some light has been shed on this matter: last December 4, Hong Kong’s  Monetary Authority (HKMA) Chief Executive Eddie Yue announced that the HKMA and the Digital Currency Institute of the People’s Bank of China are discussing the technical pilot testing of using the Digital Yuan for making cross-border payments, and are making the corresponding technical preparations.

According to Mr. Yue´s statement, “As the renminbi is already in use in Hong Kong and the status of e-CNY is the same as cash in circulation, it will bring even greater convenience to Hong Kong and Mainland tourists. While there is not yet a timetable for the launch of e-CNY, it will certainly offer an additional payment option to those in Hong Kong and the Mainland who need to make cross-border consumption.

This is not, though, the only CBDC-related project in which Hong Kong´s central bank is currently working. Last year, the HKMA launched a joint research project with the Bank of Thailand to address the various cross-border payment issues by using central bank digital currencies (CBDC) and a blockchain platform.  Other parties involved include the Hong Kong Exchanges and Clearing (HKEX), 19 banks and a few other companies, like ConsenSys, which had been awarded a cross-border payment network study project by the HKMA as part of Phase 2 of the project.

These tests in Hong Kong are very important for China, since, thus far, China has been mostly focused on domestic use cases for its DCEP, facilitating consumers´ retail payments, but the testing and subsequent adoption of the Digital Yuan in Hong Kong, which is and will remain one of the major financial hubs in the world, could be a great first step to enhance renminbi as a payments currency in the global financial system.

During a legislative council meeting in October, Hong Kong Treasury Secretary Mr. Christopher Hui said the city is most interested in wholesale and cross-border digital currency use cases, a contrast to DCEP’s initial retail-facing use cases that are being developed by the PBOC.

As I mentioned in “The RCEP, a boost for trade and Central Bank Digital Currencies in Asia” (Macau Business, November 23), China´s rationale behind its DCEP is multiple: monetary and social policy, technology and innovation, global geopolitics, financial crime prevention…, but, undoubtedly, one of the major reasons behind it is to facilitate the cross-border adoption of its new digital currency and thus challenge the global dominance of the US dollar, since, at the end of the day, one of China´s main objectives is to take some of the USD-denominated exports and convert them into yuan-based exports.

The free trade area created by RCEP, alongside the Belt and Road Initiative, will undoubtedly be a big market for China´s digital yuan, but this cross-border adoption needs to be tested first, and, in this sense, Hong Kong seems the perfect platform to do so.

And, what about Macau? Will Macau play a role in this process? 

As of today, we do not know yet when the tests will start in Macau, even though it should be very soon. In any case, the DCEP is going to bring a myriad of opportunities to Macau, which is in a perfect position to be leveraged on this initiative.  

Committed to being 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. Macau, for example, could serve as a point of connection between Mainland China and some Portuguese-speaking countries in Africa for the usage of the DCEP

To sum up, 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.

*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).