American think tank: China’s digital renminbi will impact the global financial system dominated by the US dollar. The United States must take countermeasures

As countries accelerate the exploration of central bank digital currency CBDC, especially the rapid development of China’s digital renminbi, this will have an adverse impact on the dollar-dominated financial system and the national interests of the United States.

Robert Green is a non-resident scholar of the Carnegie Foundation for International Peace’s Cyber ​​Policy Initiative and Asia Project, focusing on trends in China’s financial sector and the links between cyberspace governance, global finance, and national security.

An expert from the American think tank, the Carnegie Foundation for International Peace, wrote an article that China is actively promoting the interoperability of the digital renminbi with the digital currencies of other central banks, and is also exploring the establishment of CBDC standards around the world. The smooth advancement of China’s digital renminbi will impact the dollar-dominated financial system and affect the national security and national interests of the United States. Currently, global cross-border payments are mainly carried out through two channels. One is the Clearing House Interbank Payment System (CHIPS). It is reported that 90% of cross-border fund transfers denominated in US dollars are facilitated by the Clearing House Interbank Payment System (CHIPS). , The system is completely controlled by the United States, as long as it is a transaction related to the US dollar, it can be sanctioned by the system; the other is the SWIFT system, the Global Interbank Financial Telecommunications Association, and the United States can also prevent sanctioned entities from using SWIFT services. Therefore, through these two systems, the United States can impose sanctions on any country and institution in accordance with its national security and national interests.

As countries accelerate the exploration of central bank digital currency CBDC, especially the rapid development of China’s digital renminbi, this will have an adverse impact on the dollar-dominated financial system and US national interests. The US government must take countermeasures!

The full text is as follows:

As central banks around the world consider the risks and benefits of issuing central bank digital currencies (CBDC), China may take advantage of the current inefficiencies in the global cross-border payment sector to strengthen its protection against the central bank digital currency (digital renminbi). Support for cost alternatives. If achieved, such arrangements may allow Chinese companies and their trading partners to reduce the use of U.S. dollars in cross-border transactions and avoid the impact of the U.S. government’s closure of payment channels on sanctioned entities for national security reasons.

The digital renminbi (or e-CNY) supported by the Chinese state has been used to achieve these goals. The People’s Bank of China, the People’s Bank of China, stated in its July 2021 white paper that the digital renminbi is “ready for cross-border use” . However, to realize the grand ambition of the digital renminbi supported by the Chinese state, the digital renminbi must be interoperable with CBDCs in other countries. Therefore, the People’s Bank of China is supporting the development of global CBDC standards and cooperating with other monetary authorities to launch multiple CBDC arrangements.

Any such arrangement may face governance barriers, but if successful, a multiple CBDC arrangement can help Beijing reduce the impact of US sanctions and the use of the U.S. dollar in cross-border commercial transactions. This result is especially possible in emerging markets, where the U.S. dollar — and the US-regulated payment system — is used in international trade at a high rate, but existing cross-border payment channels are increasingly difficult to access . Washington needs to take more measures to reduce the risks that the growing global interest in CBDCs may eventually lead to increasing cross-border payment arrangements that harm the interests of the U.S. economy and national security.

Therefore, some existing efforts should be accelerated to reduce the cost of existing payment channels for large-value cross-border transactions denominated in US dollars. Washington should support the public and private sectors that aim to use new technologies to improve the efficiency of large-value cross-border transactions. s hard work. If there is no stronger policy to deal with the growing global interest in CBDC and the inefficiency of most cross-border payment channels, the United States may lose its leading influence on global payment infrastructure.

Why does the status quo of cross-border payment trouble Beijing

In the July 2021 white paper, the People’s Bank of China listed “exploring and improving cross-border payment methods” as one of the goals of the digital renminbi. Cross-border payments are mainly large-value transactions, rather than small consumer-to-consumer or consumer-to-business payments that mainly use digital renminbi. In fact, estimates indicate that more than 95% of global cross-border transactions are business-to-business, and by 2022, these types of payments are expected to exceed US$150 trillion per year. A recent statement by the president of one of China’s largest state-owned banks and the head of a state-backed think tank stated that digital renminbi will increasingly be used for cross-border business-to-business payments, and will eventually be used to help The Chinese currency is transformed into the dominant regional currency in Asia.

However, currently, the vast majority of such business-to-business transactions involving China and neighboring emerging markets are conducted in U.S. dollars. In fact, data shows that approximately 80% of Central Asia, East Asia, and Southeast Asia’s exports are denominated in U.S. dollars. According to reports, only 20% of China’s imports and exports are settled in RMB (most of the rest are settled in U.S. dollars). Globally, it is estimated that USD-denominated transactions account for approximately 40% of global exports, although the United States only accounts for around 10% of exports. In contrast, approximately 45% of exports are invoiced in euros, but this figure is comparable to the eurozone countries’ share of approximately 40% of global exports.

These statistics trouble many Chinese officials, who regard the dominance of the US dollar as a threat to international financial stability, and they also regard the US dollar as a threat to China’s financial security. Major Chinese leaders including Guo Shuqing, Chairman of the China Banking and Insurance Regulatory Commission, have also been mentioned. In April 2020, the “Qi Shi” magazine published an article that, due to the dominance of the US dollar, “the U.S. has unprecedented unlimited quantitative easing policy… erodes the foundation of global financial stability and will have unimaginable negative effects”, especially In emerging markets. Importantly, the massive use of the U.S. dollar as a trade denominated currency has strengthened its position as the main global financial currency, and vice versa. Therefore, as a senior economist at a large Chinese state-owned bank recently suggested, efforts to reduce the use of the U.S. dollar in cross-border trade may help address the broader risks associated with the U.S. dollar’s ​​dominance in global finance.

The Chairman of the China Banking and Insurance Regulatory Commission also emphasized the importance of General Secretary Xi Jinping’s call for “financial security.” Former senior Chinese officials (including current members of the Chinese People’s Political Consultative Conference) and well-known scholars close to the People’s Bank of China believe that the U.S. dollar is used as a cross-border payment. The widespread use of currency threatens China’s financial security. As they mentioned, if these organizations are involved in the transactions of companies or individuals under US sanctions, Washington may shut down the global payment infrastructure of Chinese financial institutions.

How the existing business-to-business payment system works

To understand why this is happening and how CBDC adapts to Beijing’s policy goal of reducing the use of the U.S. dollar as a global trade payment currency, it is first necessary to understand the existing channels that most business-to-business payments typically use.

Historically, it has been reported that 90% of cross-border fund transfers denominated in US dollars are facilitated by the Clearing House Interbank Payment System (CHIPS), which is based in the United States and regulated by the United States at the federal level. CHIPS uses digital technology to settle and pay U.S. Central Bank liabilities in the Federal Reserve System among participating institutions. CHIPS participants are US banks or large foreign banks with branches in the US (including some of the largest banks in China). Most cross-border business-to-business transactions denominated in U.S. dollars are usually conducted through these entities, which usually act as correspondent banks-these correspondent banks provide banking services to other banks, especially banks that do not have international branches. Ultimately, cross-border payments from a non-US company to another company usually need to pass through intermediary banks in the country/region where the seller and the buyer are located, and these banks in turn will make the payment through institutions participating in CHIPS.

These payment channels have been criticized for being costly and inefficient for companies in emerging markets. Time zone differences and multi-level correspondent bank contacts (extension due to uncommon currency matching) may cause payment settlement to take several days. This means that banks often maintain prepaid funds accounts with correspondent banks to complete customer payments, thereby gaining liquidity and driving up costs. More importantly, large global banks are worried about the profitability of banking business from emerging markets. This is partly due to concerns that these relatively small institutions cannot meet US sanctions and rules to combat money laundering. The number of correspondent banking channels that the market can use has declined.

However, as the central banks of Canada, Singapore, and the United Kingdom have recently observed, despite these problems, “correspondent banks are still the only ubiquitous cross-border payment solution.” Even if the transaction is not invoiced in U.S. dollars, it usually involves Intermediaries regulated by the United States and systems affected by the United States. Some banks will act as agents to facilitate non-U.S. dollar-denominated transactions and also serve as agent banks for U.S. dollar-denominated transactions; therefore, Washington can effectively exclude them from the dollar world because they are sanctioned by the United States for national security reasons. Businesses provide services. In addition, the messaging system used to transmit most correspondent bank payments is a service of the Association of World Interbank Financial Telecommunications (SWIFT) located in Belgium, and Washington can effectively prevent sanctioned entities from using this service.

Obstacles to China’s alternative cross-border payment channels

Many people in China worry that China is highly dependent on SWIFT and CHIPS in facilitating large cross-border payments. But if Beijing seeks to reduce its reliance on these systems and reduce the scale of U.S. dollar use in cross-border commercial transactions between Chinese companies and nearby emerging market trading partners (some of which almost all exports are invoiced in U.S. dollars), then it needs a pair of A reliable and cheaper alternative to existing payment channels. China has taken steps to create such alternatives, but there are many obstacles in circumventing the US-led payment structure.

In 2015, Beijing launched the Cross-Border Interbank Payment System (CIPS) to facilitate RMB-denominated transactions with Russia, India, and other neighboring countries. Recently, the usage of this service has increased. Beijing is also increasing cross-border trade in renminbi through the global branch network of large state-owned banks, which can facilitate renminbi transactions outside of China-many of which have been launched in Central and Southeast Asia in the past few years (including In Thailand in 2015 and the Philippines in 2021). But CIPS and China’s large state-owned banks still rely heavily on SWIFT. In addition, China’s large state-owned banks need to obtain U.S. dollars to operate in the international financial market. This provides the U.S. authorities with a policy option. If the transactions promoted by these institutions endanger U.S. national security, they can effectively isolate these institutions from the main channels of global finance.

In addition, data shows that trading in US dollars and then converting the funds into local currency is still cheaper than using the renminbi. The U.S. dollar dominates nearly 90% of foreign exchange transactions, which leads to a significant reduction in the cost of currency exchange transactions compared with other currency substitutes. If CIPS and payment channels denominated in RMB are more effective than payment channels based on SWIFT and CHIPS, then the cost of using RMB as a denominated currency can theoretically be lower than that of the US dollar, but this is not the case at present. If the renminbi is traded more freely, the cost can also be reduced, but there are major political obstacles to the large-scale internationalization of the renminbi. For example, liberalizing capital flows may harm fragile state-owned enterprises. Therefore, in the next few years, the pace of RMB internationalization will be as “steady and prudent” as stated in the recent five-year plan.

How Beijing uses CBDC to weaken the dominance of the U.S. dollar

These help explain why some people hope that the global proliferation of CBDC can provide Chinese policymakers with what they believe is the best of both worlds: an opportunity to maintain the slow and steady pace of RMB internationalization, while reducing the use of US dollars, SWIFT and CHIPS for Chinese companies and Transactions between companies in emerging markets.

It is worth noting that a recent survey of 65 central banks found that more than 60% of central banks are experimenting with CBDC, and central banks in emerging markets are “more likely to enter the pilot or implementation phase” because they believe that CBDC The demand is greater. Since China is in a leading position in CBDCs, the Central Bank of China, such as the recent observation of a senior official from the Bank for International Settlements (BIS), is training other monetary authorities in the development stage of applying CBDCs. A global organization composed of two central banks.

Large-scale global deployment of CBDC in different countries may result in multiple CBDC arrangements, so that the CBDC payment system of one country can communicate with the payment system of another country. The People’s Bank of China is already working with the Bank for International Settlements and the monetary authorities of Hong Kong, Thailand and the United Arab Emirates (UAE) to launch a multi-CBDC arrangement-originally called the Inthanon-LionRock project, but recently changed its name to mBridge. The digital renminbi white paper issued by the People’s Bank of China in July 2021 emphasized that the project clearly aims to reduce reliance on correspondent banking channels. It is worth noting that its technical subcommittee is led by the People’s Bank of China.

If successful, this multi-CBDC arrangement will facilitate cross-border payments between Chinese, Thai, and UAE companies through currency corridors under the common jurisdiction of participating countries and regions. Unlike CHIPS and CIPS, this arrangement can theoretically run 24 hours a day, 7 days a week. The CBDCs of participating countries and regions will be interoperable, and the latest mBridge prototype needs to record almost instant cross-border CBDC transactions on the same ledger. In theory, this could allow payments from Chinese importers’ digital renminbi accounts to be quickly converted to Thailand’s CBDC through the currency corridor and credited to the accounts of Thai exporters. The central bank can continuously monitor transactions. In fact, the People’s Bank of China can precisely control the level of offshore digital renminbi held by entities outside China. Smart contracts can be used to enforce such restrictions, increase payment speed, and reduce foreign exchange costs. According to a report on mBridge issued by the participating monetary authorities and the Bank for International Settlements in late September, it is estimated that the program can reduce the cost of cross-border payments by as much as 50% and shorten the payment time from a few days to a few seconds.

However, achieving these results is easier said than done, and there are still huge operational obstacles. As the Bank for International Settlements research pointed out, a major challenge brought about by this arrangement is that the monetary authorities must share the management of rules and governance. But Beijing is undoubtedly also focusing on the establishment of simpler multi-CBDC arrangements, which may stem from the streamlining of global CBDC technical standards so that these tools can be more easily used by existing systems such as CIPS to facilitate large transactions. This helps explain why Mu Changchun, director of the Digital Currency Institute of the People’s Bank of China, supported global CBDC interoperability earlier this year. It is worth noting that Chinese leaders have also called on China to play a role in the development of digital currency standards.

Increasing use of CBDC in cross-border commerce is also in line with Beijing’s desire to realize the internationalization of the RMB slowly and steadily in accordance with its requirements. As the mBridge example shows, the programmable nature of CBDC makes it easier to implement capital controls that restrict the use of foreign currencies. A recent survey of the central bank indicated that the global proliferation of CBDC will lead to more countries adopting capital controls.

In the end, some officials of the People’s Bank of China believe that the digital renminbi will make foreign exchange transactions involving the renminbi cheaper and more efficient, thereby contributing to the internationalization of the renminbi and supporting its use as a cross-border payment currency. This result corresponds to a statement by Li Bo (now Vice President of the International Monetary Fund), then Vice President of the People’s Bank of China in April 2021. He believes that the goal of the digital renminbi is not to replace the U.S. dollar as the world’s dominant currency, but to let the market choose What currency is used in international trade and investment. In other words, Beijing is seeking help to provide a competitive alternative to the U.S. dollar channel for processing large cross-border payments. It is worth mentioning that Zhou Chengjun, director of the Institute of the People’s Bank of China, believes that with the realization of the market-oriented vision of the use of RMB overseas, the capital-intensive investment in foreign currencies promoted by Beijing through the “Belt and Road” will ultimately be effective Linked to the renminbi. In other words, the renminbi can be developed into a regional currency.

U.S. policy options

So, how should the United States respond? First, Washington must make more preparations to deal with the risk of China’s successful establishment of a multi-CBDC arrangement, which is not in the interests of the United States, but provides low cost to existing cross-border payment channels based on US-supervised financial intermediaries. alternative plan. The recent bipartisan legislation in the United States requiring the executive branch to study the impact of China’s CBDC on national security is a positive step in this direction. U.S. policymakers should also study the potential economic and national security implications of successfully launching multiple CBDC arrangements overseas. In addition, it is also important for Washington to work with US allies to ensure that multiple CBDC arrangements are not established in a way that harms US interests. US policymakers should seek to better understand how US companies participate in the development of multiple CBDCs overseas.

Efforts must also be accelerated to reduce the inefficiency of existing large-value cross-border payment channels. Certain recommendations of the Financial Stability Board (FSB) in 2020 on strengthening cross-border payments, such as unified payment standards, once adopted, can increase the speed and reduce the cost of large-value cross-border transactions. However, the expected implementation date of many recommendations will take several years, and the FSB predicts that the time required for most large cross-border payments worldwide will not be reduced to one hour or less until at least 2027. An important reason for the delay in existing cross-border payment channels is that many systems used to process large payments are closed during part of the week and most of the weekend. To solve this problem, Washington can devote more resources to help convert CHIPS and FedWire (real-time payment systems run by the Federal Reserve System, which are important to the functionality of CHIPS) to run 24 hours a day, 7 days a week.

In order to further respond to China’s efforts in advancing CBDC, US policymakers should consider regulatory reforms to promote greater innovation in the private sector, aimed at improving cross-border payment channels for dollar-denominated transactions involving emerging markets. One policy option is to expand U.S. non-banking institutions’ access to digitized U.S. central bank liabilities to allow the development of affordable high-speed dollar payment solutions in markets where correspondent banking services are insufficient, while preventing potential financial stability issues. In addition, as the United States explores the possible risks and benefits of issuing its own CBDC, policymakers should also study what steps need to be taken to achieve low-cost and efficient transactions between the United States

Regardless of whether the US launches a CBDC or not, in order to deal with China’s digital renminbi in the short term, the US private and public sectors need to participate more in research and innovation aimed at reducing the cost of large cross-border payments, especially in emerging markets.

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