Written by 9:21 AM News

China wants to weaponize its currency

After years of preparation, the country began rolling out an ambitious test of a digital version of the yuan earlier this year. Pilots exist now in four Chinese cities, where transactions totaling more than 2 billion yuan ($300 million) have already taken place. If the program is expanded nationwide, China would become the most powerful economy yet to offer a national digital currency, beating a forthcoming digital version of the euro from the European Central Bank.

Beijing has touted the digital yuan as a futuristic currency that will make buying things more convenient and secure. Officials also say that it could help those who don’t have access to bank accounts and other traditional financial services. There are still plenty of hurdles for China’s program to overcome before the new form of currency is entrenched in everyday life, though. And analysts are skeptical about whether the digital yuan can pick up the traction that Beijing hopes it can, much less pose a real threat to the US dollar. The ruling Chinese Communist Party’s desire to control its financial system remains the ultimate obstacle to creating any currency that could truly become global. Like cryptocurrency, the digital yuan incorporates some elements of blockchain technology: Every transaction is recorded and traceable in a digital ledger. It would replace some of the cash that is already in circulation, according to Fan Yifei, deputy governor of the central bank.

The development of a digital currency serves other purposes, too. A more easily traceable yuan would allow the government to better manage the country’s monetary supply. It also satisfies Beijing’s desire to curtail growing influence that private tech firms and their digital payment services have on the country’s financial system.

The Chinese central bank didn’t articulate its reason for developing a digital currency at the time. The existence of the program has only come to light in recent years as the central bank has acknowledged that it feels threatened by how rapidly digital technology is evolving.

Online payment services run by Ant Group’s Alipay and Tencent’s WeChat Pay have been growing rapidly over the last decade, raising concerns about whether private companies hold too much sway over digital transactions in China.

In 2013, for example, Alipay launched a money market fund called Yu’e Bao, or “Leftover Treasure,” that became so popular that Chinese regulators stepped in and forced the program to reduce its size. They were concerned about systemic risk: If the massive fund failed for some reason, it could wreak havoc on China’s economy. “Beijing has long been concerned about the digital currency monopoly by tech giants, and their impact on the financial system beyond central bank supervision,” wrote Anthony Chan, chief Asia investment strategist for Swiss bank UBP, in a research report published earlier this year.

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