What Are the Risks and Benefits Brought On by China's e-Yuan?

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China’s new digital currency, the e-Yuan, is well on track to launch in the coming months. Pilot tests involving millions of people across multiple cities are currently being rolled. So far, China’s central bank has issued over 2 billion Yuan ($314M) in the trials.

The e-Yuan Is Like a Double-Edged Sword

The rollout of the digital Yuan will undoubtedly be viewed as an educational process for other countries with ambitions to launch their own Central Bank Digital Currencies (CBDCs). The new digital currency has been touted as a cultural shift that will allow for the internalization of the Yuan and bring increased security to the Chinese monetary system.

However, one analyst warns that the e-Yuan could introduce certain risks if it isn’t rolled out properly. Huang Yiping, the director of digital finance at China’s Peking University, believes that the digital Yuan can be a “double-edged sword” that could lead to a financial crisis if mishandled.

Addressing an online panel discussion hosted by the South China Morning Post, Huang advised China to carefully weigh the pros and cons of using the e-yuan to loosen its strict capital controls. 

The e-Yuan Carries Numerous Benefits for China

One of the primary objectives of the PBOC in issuing its own CBDC is to help with the internalization of the Yuan. The move is expected to allow China to bypass the US dollar for global finance, investments, and trade. 

The new digital currency is also expected to help Chinese authorities track capital inflows and boost the PBOC’s capacity to monitor cross-border payments. 

The e-Yuan could potentially introduce numerous benefits for the Chinese Communist Party. For one, it will enable authorities to prevent money laundering and boost cybersecurity. The surveillance of capital inflows would also allow the PBOC to detect economic risks and deploy mitigating measures earlier.

According to Henry Zheng, an exec at accounting firm EY, another critical feature of the e-Yuan is its ability to help Chinese domestic banks track digital records of fund transfers. Zheng added that Chinese citizens understand the importance of sacrificing their data privacy by adopting a CBDC in the interest of cybersecurity. 

He, however, argues that banks and mobile-payment platforms such as Alipay and WeChat Pay must step up efforts to safeguard customer data.

Boosting the International Use of the e-Yuan

The PBOC has ambitious plans to extend the use of its CBDC to facilitate cross-border retail and tourism. The central bank has even suggested that the e-yuan could be used by visiting athletes during the Winter Olympics in 2022.

That said, Carie Li, a leading economist at OCBC Wing Hang Bank, warns that the move to adopt the e-yuan has several hurdles, especially on trade.

“Trade actually is an incredibly complex topic because it touches off on many more points than just the currency itself. You will need to have very well automated customs. Ideally, you also need to have automated identity systems for corporate registries,” Li explained. 

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