OPINION-The RCEP, a boost for trade and Central Bank Digital Currencies in Asia

*By Oriol Caudevilla

One of the world´s largest free-trade deals in history, theRegional Comprehensive Economic Partnership (RCEP),was signed last November 15, after eight years of negotiations.

It is composedof fifteen countries (all ten members of ASEAN -Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, Philippines, Singapore, Thailand and Vietnam-, plus China, Japan, South Korea, Australia and New Zealand), that will create a free trade area encompassing 28% of the global economy, 30% of the global population and reaching 2.2 billion consumers.

The deal is estimated to increase the global national income by $186 bn annually by 2030 and to add 0.2% to the economy of its member states and aims to progressively lower tariffs, reduce protectionism and boost investment. Furthermore, it will allow for one set of rules of origin to qualify for tariff reductions with other RCEP members (a common set of regulations mean less procedures, therefore easier movement of goods).

Leaving aside the economic size ofthe deal, it marks the first time China, Japan and South Korea have been in a single free trade agreement, and it also marks the first time China enters a nonbilateral free trade agreement of this scale.

Moreover, RCEP aligns with China´s “dual circulation” vision, refocusing on domestic demand while taking advantage of trade and foreign investment. It must also be noted that ASEAN has become China’s largest trading partner followed by the EU and the United States. 

The RCEP is indeed a big victory for China, since it will extend its influence in the region, to the detriment of the US. In this sense, even though the negotiations to establish the RCEP started in 2012, much before President Donald Trump, it is undeniable that Trump´s protectionism has encouraged this agreement. In this regard, President Trump pulled the US out of the Trans-Pacific Partnership (TPP) shortly after taking office, and started in 2018 a counterproductive trade war with China that did not only affect the two countries, but also the economies of many countries tightly integrated into the global value chain.

As stated by Premier Li Keqiang, the RCEP is “a victory of multilateralism and free-trade”. In my article “US-China trade war: Have the costs been counted?” (China Daily HK Edition, July 9, 2018), I already warned that it was the US bet on free trade and multilateralism (as opposed to protectionism and bilateralism) which brought great prosperity to America.

The timing of the pact could not be better. On the one hand, the proposals for formulating the 14th Five-Year Plan (2021-2025) for National Economic and Social Development, released on November 3,  emphasize that that China will participate in multilateral and bilateral regional investment and trade cooperation mechanisms, being the RCEP consistent with this goal.

On the other hand, the ongoing COVID-19 pandemic has undoubtedly confronted the whole world with an unprecedented challenge. The signing of the RCEP agreement is a good step towards supporting economic recovery in Asia, inclusive development, job creation and strengthening regional supply chains. 

However, I would like to focus here on how the RCEP will impact Central Bank Digital Currencies (CBDCs).Even though, according to a report published by the Bank of International Settlements (BIS) in early 2020, 80% of Central Banks in the world are currently working on CBDCs (some are just at an initial research stage, though), Asia seems to be the place where CBDCs arouse more interest.

To me, the RCEP will pave the way for the expansion of CBDCs throughout Asia, including (but not limited to) China´s new Central Bank Digital Currency (CBDC), the digital yuan. 

In April, after several years of work (the research commenced in 2014), the Chinese Government announced the starting of the tests of the country’s central bank digital currency (CBDC), DCEP (Digital Currency Electronic Payment), in four major cities (Shenzhen, Suzhou, Chengdu and Xiong’an), notwithstanding the COVID-19 crisis. On August 14, China took a step further: its Ministry of Commerce announced that a pilot run of the country’s CBDC would begin in several new areas very soon, the Greater Bay Area (GBA) among them, which includes the two Special Administrative Regions of Hong Kong and Macau. 

China´s rationale behind its DCEP is multiple: monetary and social policy, technology and innovation, global geopolitics, financial crime prevention…

Aside from China, many other Asian countries have shown their interest in developing and potentially deploying their own CBDCs. This list includes Thailand, Cambodia, Vietnam, Philippines… as well as Korea and Japan (both the Bank of Korea and the Bank of Japan announced that tests of their own CBDCs will be conducted in 2021). Should these other countries finally deploy their own CBDCs, it will mean more market for them as well.

To what extent will the RCEP benefit China´s CBDC? Even though it is too early to say,  the free trade area created by RCEP will undoubtedly be a big market for China´s digital yuan (alongside the Belt and Road Initiative), facilitating its cross-border adoption (in the same way that it could be used to facilitate the cross-border adoption of any of the other CBDCs in Asia, even though China seems to have a clear advantage due to its economic relevance and also due to the fact that its tests are much more advanced than those of the rest of neighboring countries).

To sum up, thanks to the RCEP, China will not only strengthen its trade ties with its neighboring countries, but it will also 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, 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 author 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).