Digital renminbi – Taking the US–China geopolitical rivalry to a new level?

III. Digital renminbi – Taking the US–China geopolitical rivalry to a new level?

Eszter Boros – Marcell Horváth

The world has been interested in the potential of central bank digital currencies for years, and in 2020, China came closest to implementing the concept. Since tests of the digital renminbi (RMB) began, more and more details have become known about the functioning of this new form of money, which provides an opportunity for re-thinking the future of the world currency. A centralised e-RMB suitable for direct payments is the most serious challenge to the USD and the United States’ power in recent decades. The threat could primarily materialise through the circumventing of the US financial system, which would considerably reduce American geopolitical influence. The rise of the e-RMB may be promoted by its ease of use as well as partnerships along the ‘New Silk Road’, with China at its centre. However, if the East Asian country wishes to provide a genuine alternative to the USD, a new economic model and financial market liberalisation seem to be crucial.

1. Introduction

In the spring of 2020, during the hard times of the coronavirus pandemic, the announcement by the Chinese central bank (People’s Bank of China, PBoC) caught the whole world’s attention: the East Asian country started testing a central bank digital currency (CBDC) in real payments. The pilot project that was expanded to several provinces in the summer shows remarkable progress, therefore the digital renminbi (e-RMB) is set to be the first officially introduced (fully-fledged) CBDC. The concept of central bank digital currencies has come into focus in economic policy

discussions in recent years (mostly as digital means of payment issued by non-state actors started proliferating), and several central banks have been looking at the option of digitalising cash, which is part of the monetary base (M0). From a geopolitical perspective, it is especially telling that out of all countries, China has made the greatest strides in bringing the concept to fruition. The forthcoming central bank digital currency raises many questions, and one of the most interesting is the potential impact on the world order. Since the United States’ leading role is known to rest on its financial system and the dollar’s hegemony, the question inevitably arises as to whether the financial innovation by China, the second largest economic power, threatens this status. The present study examines these issues starting out from the conceptual features of a world currency.31 In order to assess the prospects of the e-RMB, Chapter 2 outlines the geopolitical situation, i.e. the major developments in today’s global politics. The chapter aims to provide some context to the development of CBDCs and shed light on China’s comprehensive economic and power strategy pursued in the past decade as well as its confrontation with the Atlantic force field, taking into account the effects of the coronavirus crisis. Chapter 3 analyses the prospects of the international adoption of the digital RMB. First, in Chapter 3.1, the concept of a world currency is defined, and then the factors securing the USD in this role for decades are listed. The chapter also reveals how the United States has been benefitting from this kind of financial dominance. After that, Chapter 3.2 describes the characteristics of the e-RMB (as announced to date) and the circumstances of ongoing tests. Based on the currency’s features, the advantages that could lead to a dynamic rise in future

31 Privately issued digital means of payment, including the so-called cryptocurrencies (e.g. bitcoin) are not discussed here, since, according to expert consensus, they cannot be considered alternatives to the national currencies issued by countries with respect to the functions of money, so they cannot realistically be expected to play the role of a world currency. (For the sake of simplicity, the study will refer to currency and FX as synonyms.)

RMB use are identified, placing China in an even more powerful position than today. The analysis ends with the discussion of drawbacks and hurdles as well as the options for an American response. Chapter 4 summarises the paper’s conclusions.

2. Geopolitical context: developments in global power relations related to the digital currency

The turn of the millennium was characterised by a unipolar world order based on the superior economic and military power of the United States. However, towards the end of the 2000s, the economic rise of certain powers in the developing world (e.g. China, India) increasingly shifted the global power relations into a multipolar direction. Developments in the wake of the COVID-19 pandemic suggest a further erosion in American dominance and the strengthening of Asian power centres. By the end of 2020, it had become clear that China, originally the epicentre of the pandemic, had quickly put a stop to the contagion and the negative consequences of the economic shutdown. While the United States and the European Union are still struggling with new waves of the pandemic and keeping the economy running, China seems to have restored business life to normal, and it recorded positive GDP growth in 2020 (2.3 per cent) (Xinhua 2021). Beijing used the pandemic to underline its role as a global leader and strengthen its Eurasian relations. With its so-called mask diplomacy, China provided medical aid and personnel to several of its European, Asian and Latin American partners (Wong, 2020). The rapid economic recovery also helped China in boosting its role even more in supply chains (especially in South East Asia, see Jennings, 2020). Due to this, the multipolarisation seen in recent years may even take a new direction, turning into a sort of bipolar order, with the two dominant force fields in the world comprising the US-led

Atlantic bloc on the one hand, and the Eurasian pole dominated by China on the other hand.

China seeks to develop a new, uniquely decentralised model of economic governance, in which, nevertheless, the strands in the web of trade, investment and financing relations ultimately lead to Beijing (Shaffer–Gao, 2020). Its strategic flagship infrastructure and economic development project is the ‘Belt and Road Initiative’ (BRI). Announced by President Xi Jinping in 2013, the initiative aims to link the regions along the historical Silk Road. The BRI and its complement, the 21st Century Maritime Silk Road are part of a vast Chinese ‘network’ based on memoranda

of understanding (MoUs) and trade and investment agreements as well private law contracts. It differs to a great extent from the market-oriented, US-led Western world order resting on

universal institutions. The huge bloc united by the BRI is also aptly referred to as the ‘Beijing Consensus’, to contrast it with the Washington Consensus that defined Western development until recently. The New Silk Road network is illustrated in Figure 1.

Figure 1. Land routes of the New Silk Road and the network of the New Maritime Silk Road

Rotterdam

Venice Moscow RUSSIA

Athens

Istanbul KAZAKHSTAN

Beijing Dalian

EGYPT IRAN PAKISTAN

CHINA Gwadar Calcutta Xi’an

INDIA Hanoi Fuzhou

Djibouti

KENYA Lamu Colombo Singapore

Jakarta

Land routes of the New Silk Road New Maritime Silk Road

Source: Own editing based on the map of Asia Green Real Estate.

Under the ‘Beijing Consensus’, China does not impose

ideological or political conditions on its partners, nor does

it establish economic policy expectations. (Meanwhile, the multilateral institutions in the Western world, for example the IMF, provide funding on strict economic policy conditions, and the resulting ‘reform programmes’ reflect a certain statement of economic thinking and world view.) The geopolitical agenda pursued by the Chinese government revolves around balance: mutual benefits are prioritised to maintain stable and harmonious partnerships. In other words, besides furthering its own interests, Beijing wants its partners to have enough leeway to achieve their goals and exploit the benefits of the cooperation. This may ensure a sustainable network of strong and stable allies for China, offsetting the US-centred system of alliance. The BRI is in line with the logic behind Chinese geopolitics, government planning and industrial organisation, and it is based on infrastructure creation and funding. The primary aim of building roads, railroads, ports and warehouses is to ensure the

sustained take-up of Chinese capacities (surplus goods) and to

develop local economies, leading to an organically united macro region. This means the birth of a new geopolitical force field, and for this, China follows the principle of ‘running in small steps’ (i.e. continuous experimental progress) – an approach already successfully applied in its domestic reforms. In this spirit, the initiative has recently been complemented with the development of non-physical infrastructure (‘Digital’ and ‘Health Silk Road’).

The BRI project is key in realising China’s RMB ambitions,

which in the long run may even aim to challenge the USD’s world currency status. It is common knowledge that one of the

main sources of American superpower is the multi-decade

hegemony of the USD in the international financial system32 .

32 For more on this topic, see György Matolcsy (2020): The American Empire vs.

The European Dream – The Failure of the Euro (2nd edition).

The Bretton Woods system, established in the aftermath of the Second World War, and its legacy ensure the dominance of the American currency in international trade and capital flows and among reserve currencies. (For details, see: Chapter 3.) The United States’ geopolitical strategy has traditionally been based on maintaining the Western system of alliance and ensuring the loyalty of partners scattered throughout the world (e.g. Japan, South Korea, Thailand). However, the presidency of Donald Trump brought about a certain degree of change in this approach. In the spirit of his ‘America First’ doctrine, President Trump demanded greater contribution from allies in common issues, and withdrew from multilateral platforms (e.g. Trans-Pacific Partnership, Paris Climate Agreement, Iran nuclear deal, and the suspension of American funding to the WHO during the pandemic) (Larres, 2020). Nevertheless, this does not mean that the US has renounced its superpower status, in fact, precisely the contrary is suggested by the signs. Donald Trump’s foreign policy can be interpreted as the protection of the remaining contours of the unilateral world order. This is supported by the increasingly heated rivalry with China, one of the defining characteristics of the presidential term. Trump focused first and foremost on trade, and the trade war waged through tariffs led to the signing of the Phase 1 Trade Deal by January 2020, a matter of political prestige for the president (Reuters, 2020a). Pursuant to the agreement, Beijing undertook to increase imports of American agricultural, energy and processed goods. (However, the achievement of the targets has become highly dubious after a couple of months, partly due to the economic downturn caused by COVID-19 (CSIS, 2020).) Besides trade, the other main front of American action has been

technology. The efforts to curb the rise of Chinese corporations

culminated in the Clean Network Programme announced by Secretary of State Mike Pompeo in August 2020 (The Straits Times, 2020). The planned scheme seeks to eliminate all Chinese access to American information and communication networks

(e.g. mobile applications, cloud services, internet cables and telecommunication lines). Although such a drastic severance of Sino–American economic and technological relations (socalled decoupling) is hardly possible in practice, and it would be particularly harmful for both parties (OMFIF, 2020), technology is truly key in digital financial transformation, too. It should be noted that the points of contention between the two parties are structural, they reflect long-term conflicts of interest, therefore the

confrontational tone in US–China relations is likely to persist during Joe Biden’s presidency as well.

The developments pointing towards a bipolar world order also affect other (regional) powers of the world. From the perspective of the Chinese digital currency, special attention should be paid to the geopolitical situation in India, a rising fintech power, as well as the Central and South East Asian regions. On the Indian and Central and South East Asian markets, exhibiting rapid growth in online services, the influence of Chinese high-tech firms has increased considerably in recent years. Moreover, Central and South East Asia are also directly dependent on the East Asian giant due to the integration of supply chains (Mirza 2019, Boisseau du Rocher, 2020). However, India and the countries in the two

other Asian regions have their own ambitions and/or unique

national interests, which turn them into special ground for the Sino–US rivalry and crucial players in the acceptance of central

bank digital currencies.

3. The features of a world currency and the challenge posed by the digital RMB

3.1. The USD as a world currency and its role in the superpower status of the United States

The chances for the future rise of the e-RMB can be best assessed from the perspective of fulfilling the functions of a world currency. A world currency fulfils the major functions of money on a global scale, in other words it is used internationally as a means of circulation (exchange), means of payment, standard of value and store of value. The USD has long been able to realise these, as confirmed by history and the following recent factors: – The USD is backed by the world’s largest and most advanced economy, therefore the number, value and significance of the transactions conducted with American partners alone make it practical for economic actors to use the USD. (It has to be noted, however, that the share of the United States in world trade has shrunk significantly since the establishment of the Bretton Woods system. Back then, the US accounted for 28 per cent of global exports, which has declined to 8.8 per cent (Birch, 2020). Meanwhile, China’s share was 13.3 per cent last year (Workman, 2020), which clearly shows that it has surpassed the United States as the largest commodities trading nation in the past decade (Lo, 2020). In other words, waning American economic dominance may boost the rise of the challengers.) – The deep, highly liquid and open financial market of the

USD and USD instruments ensures that those who accept this currency can open/close positions at any time, flexibly and at minimal transaction costs all over the world (International

Economy, 2020). – Thanks to the overarching stability provided by American economic policy, or at least the general transparency of the

economic policy framework, and the application of the rule of law, the USD and more broadly the assets denominated in it are high-quality investments in general (International Economy, 2020). – Commodities and raw materials (e.g. oil) are priced in USD all over the world (Smith, 2020).

– The great degree of inertia arising from established habits and strong network effects pose an enormous challenge to any currency that wishes to compete with the USD (Smith, 2020). The American currency is a true ‘network good’: its benefits mainly stem from its widespread use. Therefore replacing it would entail substantial individual disadvantages (including increased transaction costs, technical difficulties, lost customers and business). The challenger currency will have a particularly difficult time reaching the critical mass necessary for a breakthrough. Even this incomplete list shows that the factors underlying the hegemony of the USD are closely intertwined and reinforce each other, thereby strengthening the ‘workable global consensus that the dollar system provides vital public goods’ (International Economy, 2020:12). The widespread confidence in the USD is shown by the following: – the American currency comprises a steadily high share, over 60 per cent, of central bank FX reserves (2019 Q4: 61 per cent); – at the end of 2019, 64 per cent of the securities representing outstanding international credit debt were denominated in

USD; and

– in the same year, approximately 45 per cent of cross-border payments used USD (ECB, 2020).

(To compare: the RMB’s shares are: 2; <1; 2 per cent, respectively.)

The USD’s world currency status provides numerous benefits to the United States, out of which the option for an exceptional but still sustainable indebtedness and geopolitical leverage deserve special mention. Both factors are especially important from the perspective of the future rise of the digital RMB. The persistent international demand for the world currency allows the US to continuously run a current account deficit (i.e. a deficit in the external financing position). The external deficit is not only an option, it is a necessary condition for an economy’s currency to become the world currency. This ensures that there are net currency outflows towards the outside world, i.e. the liquidity necessary for international transactions is available. One of the main sources of the external deficit may be an import surplus, when the economy issuing the world currency purchases more goods and services from abroad than it sells. Non-residents are willing to finance this surplus use because (future) payments are received in the world currency. In practical terms, this means that the United States can continuously consume on credit, even at an increasing pace, depending on the dollar demand of foreign partners in theory. It does not have to expect an interest rate increase typical of overindebted countries (or only less so). Lower interest rates also mean that due to international transactions being mostly conducted in the domestic currency (USD), American economic actors face only a marginal exchange rate risk (International Economy, 2020). Power benefits also arise from the fact that the world currency supply of the global economy ultimately depends on the United States. However, this is not only about the USD itself but also about the international payment system related to it. A study by the Center for a New American Security identifies six sources of America’s superpower status, four of which are tied to the financial system (CNAS, 2019). They include the dominance of the USD and the following:

– the leading role of US financial institutions in global payments, – the global investment footprint of US investment funds and other investors,

– the transparency requirements in the US financial system. Nowadays, cross-border payments are conducted through

multi-stage clearing systems, and mainly American banks, and ultimately the Federal Reserve itself, are at the top of

this hierarchy. The messages about payment orders handled by American correspondent banks are transmitted in the SWIFT system (Society for Worldwide Interbank Financial Telecommunication), which handles a substantial share of crossborder transactions (payments worth around USD 5 trillion daily) (Kumar–Rosenbach, 2020). Thanks to this, the United States is in an exceptional position to monitor international payments: it can detect illegal financial flows, for example money laundering and terrorist financing, and check whether international sanctions are enforced. Economic and financial coercive measures (banning transactions related to individuals/organisations/countries, investment and trade restrictions, embargoes, tariffs etc.) have

become one of the most important tools of US foreign policy

in the past decade, for example against Iran, Russia and China. In 2019, the United States administered 30 different sanctions programmes in total (CNAS, 2019). Even if the sanctions are not imposed with the approval of the international community, the

influence of American financial institutions makes foreign

actors comply with them, irrespective of whether the transactions in question are in USD or not. This is because foreign banks do not want to jeopardise their ties to American financial institutions, so they also refrain from conducting financial transactions for the sanctioned individuals and organisations. Similarly, American investment funds and their partners expect US provisions to be enforced all over the world, and American standards (transparency, disclosure requirements) are also widely expected to be applied in international business relations. Nonetheless, the

key to enforcement is clearly SWIFT, the point where the Chinese

CBDC poses the greatest threat.

3.2. The digital RMB and its potential consequences in the geopolitical arena

In the spring of 2020, the Chinese central bank reached a milestone in the development of the e-RMB despite the coronavirus crisis. According to an announcement in April, tests of the central bank digital currency started in actual payments in four large cities (Shenzhen, Suzhou, Chengdu, Xiong’an) (WSJ, 2020a). The development of the currency officially referred to as Digital Currency/Electronic Payments (DC/EP) began in 2014, and according to central bank statements, it was accelerated in 2019 upon the news that Facebook would introduce its own digital currency (Libra) (Gulliver-Needham, 2019). Shortly after the publication of the Libra framework, the social media company proclaimed that 50 per cent of the asset would be pegged to the USD. Therefore, the PBoC views Libra as not only a risk to financial sovereignty and stability but also as a promoter of American power interests (Copeland, 2020). China’s response clearly shows that Beijing has realized the advantages of being

the first mover in introducing a state-backed digital currency

(Ferguson–Parker, 2020). In August 2020, the PBoC expanded testing to further large cities and regions (including two provinces neighbouring Beijing as well as the southern coast of Guangdong, Hong Kong and Macau) (WSJ, 2020b). During the trial, some of the public, for example government employees, receive their benefits in digital RMB, which they can use to pay at merchants and service providers involved in the testing. According to the PBoC, 3.1 million transactions were conducted until early October 2020, to the tune of over RMB 1.1 billion (USD 162 million) (SCMP, 2020).

No official date has been set for nation-wide introduction yet,

and in the spirit of an experimental approach, Chinese leaders

are expected to be cautious about this step. Nonetheless, the launching of the e-RMB is in line with the priorities of the 14th Five-Year Plan (digitalisation and the social and economic role of online platforms). According to the information published so far, the e-RMB will play a key role at the 2022 Winter Olympics (WSJ, 2020b).

The e-RMB is a cash-like digital means of payment issued by the Chinese central bank. Officials claim that it was designed to replace cash. Nonetheless, there are no plans to change the role of commercial banks, so the digital currency will reach economic

actors through the banking system and popular payment service

providers (Birch, 2020). (For example, economic actors may request CBDC via the e-RMB app against the balance of their bank account or mobile wallet.) Major Chinese banks (e.g. Agricultural Bank of China, Bank of China, China Construction Bank, Industrial and Commercial Bank of China) and leading mobile wallet providers (Alipay, WeChat) also take part in the development of the currency. Due to the centralised nature of the digital RMB, the PBoC will have an overview of all transactions, therefore the new currency will differ from traditional, fully anonymous cash in this respect. Although parties sending and receiving the money will remain completely unknown to each other when using the e-RMB, they will not be unknown to the central bank or the state for that matter (Reuters, 2019; Birch, 2020). This provides a huge real-time database of economic policy information to China (Ferguson–Parker, 2020), which can be more directly controlled and/or which is more comprehensive than information from popular mobile payment apps, commercial bank accounts or shadow banking activities. On the other hand, tangible geopolitical advantages can also be gained: if the e-RMB became widely used in cross-border payments, it would offer China global control, similar to SWIFT. The Chinese CBDC was designed for direct transactions, which is also hugely important. In the system that also works

offline, payments are made directly between the parties, thereby eliminating the underlying bank clearing steps (Birch, 2020). This brings a potentially huge advantage in speed and costs compared to the traditional operation of SWIFT based on bank networks. The absence of intermediaries could make the use of RMB more attractive in large parts of the world, especially if American control is also sought to be circumvented. Several papers point out (CNAS, 2019, International Economy, 2020) that the widespread use of sanctions has recently raised eyebrows even among US allies. For example, Donald Trump’s abandonment of the nuclear deal with Iran (Joint Comprehensive Plan of Action, JCPOA) and renewed economic restrictions have caused quite a paradoxical situation for the European Union. The EU endeavoured to create its own clearing mechanism to continue trading with Iran by circumventing the American financial system. In the light of this, it is hardly surprising that powers that are on less amicable terms with the US have also made similar attempts. Russia announced in 2018 that it had developed its international financial messaging service, designed as an alternative to SWIFT (CNBC, 2018). And China established the Cross-Border Interbank Payment System (CIPS) for cross-border RMB clearing in 2015 (CNAS, 2020). (Albeit, this system follows the logic of traditional payment structures and Western banks also participate in it (Lo, 2020).) On another note, Beijing and Moscow agreed to phase out the USD from their trade with each other (Russia Briefing, 2019). This shows that the main advantages of the e-RMB are geopolitical, all the more so because the share of cash transactions is already low in China. Residents and companies like to use the mobile payment solutions offered by Alipay and WeChat: in 2018, 83 per cent of payments were conducted digitally with mobile devices (Atlantic Council, 2020a). Therefore, the efficiency gains of transitioning to a cashless society may be dwarfed by the long-term geopolitical benefits. Beijing has sought to promote the international use of the RMB for years, and, owing to its positive features, the digital currency can act as a catalyst in

this regard. China’s financial measures so far (funding the BRI projects, establishing new development banks, bilateral swap agreements etc.) could become really powerful when coupled with the e-RMB.

The dedicated goals of the BRI project include the financial integration of economies along the ‘New Silk Road’ (NDRC, 2015), which Beijing wishes to do with the help of the RMB. The efforts are warranted by the fact that the Asia-Pacific region trades twice as much with China as with the United States (Smith, 2020). Moreover, the overwhelming majority of BRI investments are financed by the East Asian giant, through state-owned commercial banks and multilateral development banks under Chinese leadership (e.g. Asian Infrastructure Investment Bank, AIIB) (Shaffer–Gao, 2019). However, the strengthening of financial ties has not entailed a surge in RMB use yet. According to PBoC data, the transactions between China and BRI countries recorded in RMB (RMB 2.73 trillion) accounted for merely 5.3 per cent of all international clearing transactions of the East Asian country in 2019 (PBoC, 2020).33 Most of this (RMB 732.5 billion) came from the trade in goods, and only RMB 213.5 billion34 appeared as cross-border financing. This is because BRI lending has mainly occurred in USD (Financial Times, 2018). Target countries and infrastructure-developing companies typically preferred the USD.35 Beijing did not oppose the use of the American currency

33 According to the report, China’s total cross-border financial clearing transactions amounted to RMB 51.63 trillion in 2019. Of this, 38.1 per cent (RMB 19.67 trillion) represented clearing transactions denominated in the Chinese currency. The RMB transactions with only BRI countries, at

RMB 2.73 trillion, accounted for 5.3 per cent of the annual total. 34 Worth USD 31.5 billion.

35 Even though most construction companies are also Chinese (Shaffer–Gao, 2019).

One possible reason for preferring the USD is that the technology necessary for large-scale developments is often unavailable to Chinese companies, and it can only be obtained from Western partners in the global market.

either, as it had massive USD reserves thanks to its sustained current account surplus (Ferguson–Parker, 2020; Lo, 2020). Yet not even China can lend in USD indefinitely, especially in the light of the economic development path announced by President Xi Jinping, who seeks to make domestic consumption the driver of Chinese growth. The pick-up in domestic demand, and the convergence of relatively less developed Chinese regions, will entail a rise in imports. Thus, the evaporation of the external surplus will limit the opportunities for traditional USD financing down the road.36 This is another reason why China should

promote RMB use along the ‘New Silk Road’.

There are several signs that Central and South East Asian countries are ideal for these efforts. A significant part of the region’s population does not use financial services, so there

is great growth potential in the market, especially in digital

(mobile payment) solutions (Ferguson–Parker, 2020; Smith, 2020). This is beneficial for the future acceptance of the CBDC, and the channels of e-RMB transactions have already been prepared in some sense. Due to acquisitions in recent years, Chinese tech giants Tencent and Alibaba now have a major interest in the region. They have invested in local payment service providers such as Telenor in Pakistan and Lazada, bKash and Akulaku in South East Asia (and Paytm, operating in rival India, should also be mentioned) Ferguson–Parker, 2020). Currently, the RMB is difficult to access in payments outside China (International Economy, 2020), but Chinese owners can offer the option to pay in e-RMB on popular local payment platforms. This prospect should not be underestimated, because experience has shown that ‘as infrastructure leads, the assets often follow’ (International Economy, 2020:16). Since economic actors increasingly transact with Chinese partners along the ‘New Silk Road’, after a while,

36 Incidentally, the contraction of external surplus points in the same direction as the balance of payments condition necessary for the world currency status.

they may find it convenient to use the e-RMB payment option offered by their everyday mobile app (Birch, 2020). It should be underlined that the BRI also expands the Chinese diaspora, whose presence (e.g. in local stores) may also be encouraging (Shaffer–Gao, 2019). The remittances by migrant workers are crucial in the life of Central and South East Asian economies (Smith, 2020), which is also of considerable importance. Using e-RMB mobile wallets may be a quick, cheap and efficient way to provide financial support to families at home. Regarding the international expansion of the new digital RMB, it is remarkable that the PBoC joined the so-called Multiple CBDC Bridge initiative in February 2021. The project, involving the Bank for International Settlements (BIS), Hong Kong, Thailand and the United Arab Emirates (UAE) as well, is seeking to create new digital ways of cross-border payments (BIS, 2021). By the way, the use of the e-RMB may not necessarily be a simple matter of choice. China is likely to expect BRI partner countries to use the e-RMB. This requirement will be especially important as the Digital Silk Road comes into focus. COVID-19 has accelerated the shift in the priorities of China’s development strategy: the post-pandemic recovery and foreign investments now focus on the digital economy with high value added (and less so on physical infrastructure). The Digital Silk Road initiative also aims to foster the development of 5G internet connections, data centres and the automatic systems necessary for operating electric vehicles (Ferguson–Parker, 2020; Greene–Triolo, 2020). Digital payments are pivotal in these networks, so the e-RMB could be incorporated into the implementation ‘without anyone noticing’. Yet in order to exploit these synergies, Beijing needs to take

decisions that help fulfil the conditions of the world currency

status. The Chinese leadership may incur difficulties here because this requires the acceleration of the change in the economic model in several respects. One such issue is the above-mentioned

external financing position. Economic policy has already shifted somewhat towards a consumption-driven growth model (and future external deficit) that ensures meeting the future RMB demand of the world (i.e. currency outflows). However, there are also partly contradictory stances, for example the promotion of import substitution. In that spirit, China launched its ‘Made in China’ industrial development policy in 2015, which targeted a kind of ‘self-sufficiency’ and increasing industrial value added produced domestically to 70 per cent by 2025 (Shaffer–Gao, 2019). The devastating effect of the coronavirus pandemic on supply chains as well as foreign policy tensions have recently shifted China’s attention to internal economic circulation (Reuters, 2020b; SCMP, 2020b). Nonetheless, meeting mostly domestic customer needs would scarcely be in line with the intention to circulate the RMB internationally. World currency ambitions are much more aligned with the network-based model in which production with low value added content is outsourced to South East Asia and Africa, while China functions as a high-tech centre. In other

words, over the medium term, Chinese leaders will have to

strike the right balance in the ‘dual circulation’ (domestic and external economy), which will open the door to a rapid rise in RMB use outside China.

A closely related issue is that of the exchange rate and financial liberalisation. Experts agree that the international use of the RMB is mostly hindered by current Chinese capital controls (Lo, 2020). In itself, an efficient and convenient digital payment option that makes it possible to circumvent the US will not eliminate this problem (International Economy, 2020). The RMB has a managed exchange rate, which, albeit positive for investors looking for stability amidst the COVID-19 situation (cf. Bloomberg, 2020), may make market participants more cautious overall. This could be especially true in the light of the Chinese political mechanisms, which are not quite transparent from the outside. The emergence of a large and liquid RMB market is hindered by fragmentation (the separation of the onshore and offshore markets) and lack

of the free use of the currency. For example, China does not allow residents to convert or transfer abroad larger sums in RMB (cf. SCMP, 2020c), and it restricts the flow of income earned in the country to financial markets, thereby also the repatriation of the profits of foreign players (Peters–Green–Yang, 2020; Kärnfelt, 2020). In recent years, Beijing has started to open up financially: for instance, stock connections have been expanded (Stock Connect Scheme: Hongkong–Shanghai–Shenzhen, Shanghai–London Stock Connection) (Lo, 2020; PBoC, 2020). Nevertheless, any further liberalisation can presumably occur only gradually, in accordance with the process of the change in the economic model and Chinese leaders’ stability efforts. Over the medium term, this limits the

RMB’s ability to reach a full-fledged world currency status.

However, the testing of the CBDC is an unprecedented leap ahead on this road, and the United States cannot ignore this. The development of a digital USD has not started yet. In June 2020, Fed Chair Jerome Powell said that the issue was being considered (Atlantic Council, 2020b; Coindesk, 2020). Still, despite the fact that it lags behind, Washington may be able to mitigate the impact from the future introduction of the e-RMB. Besides the traditional factors strengthening the USD, this can be mainly achieved with

the country’s geopolitical position and its network of allies.

America has already stepped up its diplomatic efforts in South East Asia and India. India is part of the so-called Quadrilateral Security Dialogue (QUAD), which is intended to offset China’s power, and in which the US, Australia and Japan also participate. The United States has recognised that it can also exploit the tensions in the South China Sea to win over the region’s countries to line up against China. However, in order to expand the scope of cooperation in security policy, the US also has to considerably

increase its investments in South and South East Asia.

Another key to managing the challenge posed by the e-RMB is that the United States should mobilise its resources to facilitate the digitalisation of its economy and financial services. Some

American politicians also argue that the US should primarily focus on strengthening SWIFT, rather than developing its own CBDC (Birch, 2020). It is probably no coincidence that SWIFT recently announced major infrastructure developments and an expansion of its services (Central Banking, 2020). The consortium aims to establish a comprehensive transaction management system in the next two years, to increase the speed and reliability of transactions and support customers’ clearing, fraud detection and IT security processes. Besides the improved efficiency of the USD-based payment system, the CBDC developments within the Atlantic alliance may also hamper the future rise in e-RMB use. According to the Atlantic Council (2020b), Canada and Sweden have already started CBDC implementation. Among the CBDC projects in Asian countries that are at an advanced stage, one should mention the programmes in the United Arab Emirates, Cambodia, Singapore, Thailand and South Korea, which may counterbalance Chinese developments in the region. (In 2021, Japan will also start its CBDC tests, with the primary aim of preparing for future digitalisation challenges (Japan Times, 2020). In its national blockchain strategy published in late 2019, India also mentioned the possibility of creating a digital rupee (NISG, 2019).) Nevertheless, taking into account the e-RMB’s advantage and China’s economic power,

Beijing’s digital currency will clearly be the most promising

contender of the USD in the next few decades in the competition for world currency status.

4. Summary, conclusions

The three main drivers behind the developments in the 21st century are money, technology and mobility, which together, in interaction with each other, determine the paths of growth and influence geopolitical relations (MNB, 2019). A central bank digital currency is a fusion of precisely these three

factors, and China can use it to give additional impetus to the wave of digitalisation that increasingly pervades everyday life. Chinese tech giants (e.g. Alibaba, Tencent, Huawei, ZTE) have become dominant in trade, services, communication, healthcare, logistics, agriculture and several other sectors. These companies have transcended China’s borders (as they have been entering the Indian, South East Asian markets, inter alia).

Their presence supports the geopolitical plans of the central government, namely the establishment of a regional network and the new force field of the ‘Beijing Consensus’. One of the

pillars of this economic and technological paradigm shift is financial innovation, the search for the money of the future. The digital RMB can pave the way for a new, complex cooperation between regions, resting on China’s geopolitical and economic management principles. With the introduction of the e-RMB, which is expected to take place soon, the questions surrounding central bank digital currencies will be tested in practice. Among the emerging developments, the shift in geopolitical relations is one of the most significant. The

digital RMB could prove to be China’s most powerful weapon yet in its unfolding rivalry with the US, which increasingly pushes the international community towards a bipolar world

order. The challenge posed by the e-currency is special because

it can undermine one of the main pillars of the United States’

power, its financial dominance. The most important ‘trick’ of the e-RMB is direct transactions, as the system will be able to complete payments without underlying clearing transactions. This saves a considerable amount of time and cost, and also allows the traditional international payment system dominated by American banks to be circumvented. The US may lose its control over global payment transactions and thus also over the enforcement of the sanctions imposed on its adversaries. On the other hand, China could obtain an exceptional information base, which may improve the effectiveness of its economic policy and multiply its global power.

The e-RMB is closely linked to Beijing’s strategic project, the ‘Belt and Road’ programme spanning Eurasia. The constellation of

several factors suggests that the BRI region will be ideal for

an efficient rise in international RMB use. Nowadays, the population of Central and South East Asia flock to join mobile payments, and they mostly see Chinese-owned platforms. The option to pay with e-RMB in local apps, together with the economic ties of the ‘New Silk Road’, could make the use of the Chinese currency attractive. In fact, this will not be a simple matter of choice, as China increasingly expects the RMB to be used along the belt. The change to a new economic model (consumption-driven growth) foreshadows a decline in the huge USD reserves, which may also increasingly shift BRI financing towards the Chinese currency. The key to China’s ability to ensure the RMB’s foreign circulation is the economic transformation implemented with due consideration (striking the right balance between external and internal ‘circulation’). This outlines a unique economic and financial network, a new Eurasian force field, controlled by Beijing. However, the RMB’s sustained global success is influenced not only by the consumption-driven model ensuring currency outflows but also by other economic ‘rules’. The establishment of

the very deep, liquid and open financial markets characteristic of a world currency may prove to be a tall order for Beijing.

Therefore, competing with the American currency’s features will be difficult in the long run. The United States is also expected to take steps that preserve the benefits of the USD. If the US also opts for rapid digitalisation, that could be especially effective in this respect. Instead of developing a digital currency, a large-scale modernisation of SWIFT may prove to be enough in ‘cementing’ the position of the USD. Furthermore, the US has its own network of allies, which, when mobilised assertively, could influence power relations even in the regions covered by the BRI (e.g. South East Asia).

In conclusion, the RMB still has a long way to go if it wishes to fulfil the functions of a world currency, but the potential

introduction of a CBDC could undoubtedly prove to be the

greatest leap forward on this road. A much more accessible and efficient form of ‘cash’ can essentially boost the medium of exchange function, and economic and financial relations along the ‘New Silk Road’, and combined with China’s ambitions could entail other forms of use as well. All in all, the digital RMB is

expected to be the most promising challenger of the USD and a cornerstone of China’s rise in the decades ahead.

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