AlwaysFree: China Developing The Digital Yuan To Protect Its Interests

• The ruling Communist Party is sacrificing innovation on the altar of social stability

According to The Japan Times article published on December 13, 2022, the invasion of Ukraine unfolded as the first significant transnational conflict of the digital age. Concerns have been raised about whether emerging digital financial instruments might undermine the global order, curbing the effectiveness of sanctions.

Russian President Vladimir Putin’s war provoked the West to launch broad retributions and an increasingly saber-rattling China should be looking for ways to protect its national interests.

Bearing in mind the economic penalties imposed by Washington, the Chinese government has every right to be afraid. All eyes are on its leaders, widely regarded as challengers to the so-called global order.

Many Western lawmakers claimed that cryptocurrencies could allow for transactions without the need for any intermediaries or the support of SWIFT. Indeed, trading between the Russian ruble and bitcoin has soared since Russia’s disconnection from the payment messaging system was enforced. The idea is not new, as Iran and North Korea reportedly transacted using the cryptocurrency.

But China banned cryptos and the decentralized blockchain, deciding instead to develop the digital yuan, which is backed by its central bank. Stored in a digital wallet instead of a bank account, it aims to replace cash in circulation, but also provides the government with unprecedented levels of personal information.

This move has made it clear that the Chinese leadership wants to harness the technology on its terms to match its authoritarian aims. Now, they are actively promoting to their citizens the technology which, in the end, has little in common with privacy and decentralization. Nevertheless, the digital yuan will have a significant global impact, as it will create the most extensive database of centrally regulated financial transactions.

Analysts agree that the Chinese government's approach to digital technologies is extensive and meant to achieve its goal of becoming the world's industry leader, while the technology itself has increasingly become a key arena in its race against the United States.

Hong Kong has recently revamped the idea of allowing crypto trading to challenge Singapore as the regional financial hub. But still, the crypto industry, in which blockchain operates, is too shallow and lacks sufficient liquidity to meet the broad needs of any sovereign nation.

This answers the question of whether today's cryptocurrencies could be effectively used by China to evade sanctions. Decentralized financial technology remains unable to replicate the scale and efficiency of SWIFT.

But China counters its own objective of undermining the dominance of the dollar. Its robust support of the cryptocurrency sector would have been a game changer, allowing the risk-hungry traders to tap into the market that rejects the dollar as a mode of payment.

Instead, the country has chosen the slow path of internationalizing its currency, believing that if its popularity grows, more individuals may be encouraged to utilize the digital yuan as a currency for making payments worldwide.

In its efforts to lessen reliance on the U.S. dollar-dominated financial system, China is now attempting to utilize its commerce position and stimulate invoicing in the digital yuan.

But to effectively internationalize the digital yuan, China would need to gain the global users’ trust in the strength of the Chinese financial system and the security of its digital currency. One step toward that goal is that China is also close to making currency exchange arrangements with some of its friendly bordering countries.

If nations establish multiswap agreements with one another, transaction settling by commercial banks and central banks will become superfluous. There will be no need to go through the U.S. dollar, American institutions, or even the SWIFT network.

But this process will take decades, therefore the assumption that the adoption of the digital yuan will change the trajectory of the entire financial system has wrongly led some to believe that the Chinese currency will soon be on a par with the dollar.

Their view fails to recognize that the only thing that is changing is the mechanism of currency that is changing from physical to digital. China’s central bank controls fluctuations of the digital yuan and its supply depending on the economic conditions.

A quickly internationalizing yuan is something China does not desire politically because it wants to keep trading it within a regulated bandwidth. While Beijing may begin to contemplate easing currency control in the future, the yuan is not set up for total reform any time soon.

Although the pace of rise in the percentage of foreign currency reserves denominated in yuan looks large, it has little influence when compared to the rate of growth in reserves denominated in dollars. The U.S. dollar accounts for almost 62% of total foreign currency reserves, while the yuan for just 2%.

Despite China's strenuous efforts to internationalize its currency, the yuan still ranks lower than the world's other major reserve currencies. Furthermore, the simplicity with which a currency may be used all over the world defines its attraction and utility.

Essentially, important commodities such as oil and petroleum are invoiced in U.S. dollars, and as long as their prices are priced this way, the possibility of a new currency making a difference in the global market remains minimal.

In the foreign payment sector, 40% of payments were done in dollars and just 1.76% in yuan, highlighting the differences in currency's appeal and usability.

As a result, China has restrained its own power, believing in the supremacy of surveillance of the state over the innovation made by the people.

Although the digital yuan appears to be a promising investment for China, it has little ability to challenge the dollar's dominance and take over the international payment system.

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