Prospects and opportunities for digital renminbi under the new development pattern

The People’s Bank of China has adopted a positive and prudent attitude towards the launch of digital renminbi. Since 2014, the People’s Bank of China has established a special team to conduct special research on digital currency. At the end of 2019, the digital renminbi has been piloted in several regions. Currently, the digital renminbi is being piloted It has been expanded to “10+1” in an orderly manner, basically covering the Yangtze River Delta, Pearl River Delta, Beijing-Tianjin-Hebei, central, western, northeastern, and northwestern regions, covering various aspects of the payment field. The operating entities have expanded to 9 banks including Bank of China, Agricultural Bank, Industrial and Commercial Bank of China, China Construction Bank, Bank of Communications, Postal Savings Bank, China Merchants Bank, MYbank and WeBank, and other small and medium-sized banks will also provide digital RMB services.

The positioning of my country’s digital renminbi is different from other digital currencies. First, the digital renminbi is positioned as a legal currency in digital form. It is cash in circulation. Statistics enter M0 (cash in circulation). It will coexist with banknotes and coins for a long time in the future. Second, digital renminbi is a new means of payment. The existing payment methods include the UnionPay model and third-party payment. The digital renminbi is a new form of payment, and the bank has changed from a bookkeeping agency to an order transmission agency. Third, the digital renminbi makes full use of the existing resources of commercial banks and adopts a two-tier operation system, that is, the upper layer is the central bank to commercial banks, and the lower layer is commercial banks to the public.

The pilot program started in 2019 has effectively verified the digital RMB business technology design and system stability, product ease of use and scene applicability, mainly reflected in: First, the pilot program has covered all areas of the existing payment system. In particular, the Beijing Winter Olympics provided a full-scenario pilot for digital renminbi, covering the needs of seven key areas such as food, housing, transportation, travel, shopping, entertainment, and medical care. At the same time, it also successfully piloted cross-border payments in Hong Kong. The second is to enhance the public’s understanding of the digital renminbi through the pilot, and the digital renminbi has formed a certain scale. As of December 31, 2021, there have been more than 8.0851 million digital RMB pilot scenarios, 261 million personal wallets have been opened, and the transaction amount has reached 87.565 billion yuan. Third, the successful launch of the digital renminbi APP further accelerated the promotion of the digital renminbi. On January 4, 2022, the public launch of the digital renminbi (pilot version) APP further accelerated the use of digital renminbi, and many commercial banks are gradually connecting.

1. The successful pilot of the digital renminbi is conducive to the internationalization of the renminbi

In recent years, central banks around the world have actively carried out the research and development of central bank digital currencies. According to the report of the Bank for International Settlements (BIS), in July 2021, at least 56 central banks have carried out relevant research, and 6 central banks have issued digital currencies. Three explicitly oppose central bank digital currencies. The dollar has not yet reached a consensus. U.S. Treasury Secretary Yellen pointed out that the pros and cons of central bank digital currency need further study, but some Fed governors expressed the need to urgently develop a digital dollar, and U.S. President Biden also said that he would start the U.S. central bank’s research on digital currency. The launch of the digital renminbi will have a great impact on the international community and the international monetary system, mainly because:

my country’s economic strength has been further strengthened. On the one hand, in 2021, my country’s total economic volume will reach 114,367 billion yuan, and the per capita GDP will reach 80,976 yuan, which will reach 12,551 US dollars at the annual average exchange rate, which means that my country has begun to enter the ranks of middle and high-income countries, and the future market demand will be huge; on the other hand, Since 2013, my country has become the world’s largest trading country. Especially under the influence of the epidemic, my country’s foreign trade has grown rapidly. In 2021, my country’s annual import and export of goods will reach 39.1 trillion yuan, an increase of 21.4%. It further enhances the impact of digital renminbi on international payments.

The international status of the renminbi continues to improve. With the strengthening of my country’s economic strength, the status of RMB in the international payment system and reserve system has been continuously improved, which has made the launch of digital RMB more widely concerned. From the perspective of international payments, in the payment amount ranking of major currencies in 2021, the share of RMB international payments rose to 2.70%, replacing the Japanese yen as the fourth currency; from the perspective of international reserves, the share of RMB has been growing steadily. In the third quarter of 2021, the proportion of RMB in global foreign exchange reserves rose to 2.66%, ranking fifth in the world.

my country has the largest application scenario in the world. my country is the most populous country in the world. As of the end of February 2022, the number of mobile phone users of the three basic telecommunications companies reached 1.651 billion, and the number of 5G mobile terminal connections reached 520 million, which provides more test scenarios for digital currency. .

2. Digital RMB has obvious advantages over existing third-party payment

The digital renminbi is an important supplement to the existing payment methods. Although the current pilot digital renminbi is only over 87 billion yuan, which is a very small part of the non-cash payment business, the digital renminbi will promote the formation of a new payment pattern in my country.

First, the digital renminbi is more legally guaranteed. In theory, commercial banks may go bankrupt, and deposit insurance has certain protection for users’ property; Alipay and WeChat use commercial banks for settlement, and there is no deposit insurance. Therefore, once there is a risk, users will suffer huge property losses; digital renminbi It is the legal tender of the country and is guaranteed by the national credit, which is more legally guaranteed.

Second, digital renminbi payments are more convenient and cost-effective. First, the digital renminbi can be received in real time, which improves the efficiency of the use of funds and the transmission efficiency of monetary policy. Second, the digital renminbi is more cost-effective. On the one hand, the issuance cost of digital renminbi is much lower than the current issuance cost of banknotes and coins. On the other hand, UnionPay cards require a 0.6% handling fee, and QR code payments (WeChat, Alipay, etc.) require a 0.38% handling fee. Digital RMB is different from UnionPay cards and third-party payments, and is non-profit.

Third, the digital renminbi is more secure and provides better protection for users. On the one hand, the loss reporting function and real-name system of digital renminbi can make it safer for users to hold digital renminbi; on the other hand, the government can better protect the big data information generated by consumers and merchants in the process of digital renminbi transactions. Banks are under the dual supervision of the People’s Bank of China and the China Banking Regulatory Commission, which is conducive to improving my country’s data governance environment and enhancing the security of consumers’ personal data.

Fourth, the digital renminbi is more inclusive and is also conducive to breaking the payment monopoly. Digital RMB supports offline payment, similar to banknotes, and can meet the use in areas that are not covered by the network and in specific places; third-party institutions often set up transaction barriers in order to compete (WeChat and Alipay block each other’s payment methods in their respective application scenarios) , increasing the additional payment cost and burden for users (users need to have WeChat, Alipay and other applications at the same time), and the digital renminbi is more conducive to breaking the payment monopoly.

Fifth, the digital renminbi is more convenient for financial supervision and prevention of financial risks. The traceability of the digital renminbi allows the central bank to monitor the complete information such as the names and amounts of both parties to the transaction.

3. The digital renminbi will have a significant impact on the implementation of my country’s macro policies

The launch of the digital renminbi will not only have an impact on the new pattern of payment in my country, but also, as the country’s legal tender, will have a positive effect on my country’s macro policies, especially monetary and fiscal policies.

First, the application of digital renminbi will make the transmission of my country’s monetary policy smoother and more flexible. The 2021 Central Economic Work Conference proposed that “macro policy should be stable and effective” and “prudent monetary policy should be flexible and appropriate, and maintain reasonable and sufficient liquidity”. In the past, the transmission mechanism of my country’s monetary policy was not smooth. The implementation of monetary policy required financial institutions such as the People’s Bank of China to commercial banks. The transmission chain was too long. Digital currency will change this transmission path, shorten the transmission chain, and even reach enterprises directly. This will greatly enhance the flexibility of monetary policy. In theory this is because the PBOC can monitor the portfolio of digital yuan agents and cross-subsidize between agents, but this is not possible if the agents use cash.

Second, the digital renminbi can enable the implementation of my country’s structural monetary policy and further solve the problem of unbalanced and insufficient development in my country. On the one hand, monetary policy originally acted on the total amount, and fiscal policy was mainly used for structural problems. However, monetary policy has obvious structural effects on my country’s economy, including regional differences and industry differences in monetary policy. The issue of structural differences in policy impact requires corresponding structural monetary policies, and the digital renminbi provides a means for the introduction of structural monetary policies. On the other hand, my country’s economic development has entered a new stage, and the problem of unbalanced and insufficient development is still very prominent. The introduction of a structural monetary policy can better solve the unbalanced economic development of our country.

Third, the digital renminbi will greatly enhance the inclusiveness of my country’s finance and promote common prosperity. Digital technology has greatly promoted technological progress and economic growth, but the widespread application of digital technology will lead to the problem of unequal income distribution, which is not conducive to my country’s substantial progress in promoting common prosperity. The digital renminbi facilitates the introduction of policies for specific industries, specific regions, and specific groups, and is more convenient to solve the problem of unbalanced development, thereby making up for the adverse effects of digital technology on some regions, and promoting substantial progress in common prosperity.

Fourth, the digital renminbi enhances the coordination of monetary policy and fiscal policy. The launch of digital renminbi has had a significant impact on fiscal policy. For example, financial direct access can make direct access faster and more flexible; digital renminbi can play a positive role in poverty alleviation, structural tax reduction and fee reduction.

Fifth, the digital renminbi is conducive to the implementation of my country’s policy of expanding domestic demand and the accelerated construction of a new development pattern. First, the digital renminbi is conducive to improving the business environment and increasing the investment of private enterprises. On the one hand, the digital renminbi has no handling fee, which reduces the operating costs of enterprises, especially small and medium-sized enterprises, and plays a key role in reducing taxes and fees; on the other hand, the digital renminbi has a direct function of funds, which provides structural monetary policy support for the central bank The development of SMEs provides an important means. Second, the digital renminbi can reduce the cost of the public in the transaction process and boost consumption. The launch of digital renminbi can directly reduce consumption costs, and the state can also introduce more subsidy measures through digital renminbi to implement precise policies.

Sixth, the digital renminbi will play an important role in international payments, helping the internationalization of the renminbi and ensuring my country’s financial security. The current cross-border payment system is based on the global network established by SWIFT and CHIPS, which has the problems of low efficiency, high price and poor security. In particular, the core of the existing cross-border payment system is American companies. The United States can use cross-border payment as a tool for financial sanctions to restrict enterprises in sanctioned countries from conducting cross-border business activities and threaten national financial sovereignty. The digital renminbi provides more convenient conditions for promoting the cross-border use of the renminbi and prepares for the internationalization of the renminbi.

4. There are many problems to be solved urgently in the development of digital renminbi

Although the digital renminbi has advantages that other payment tools do not have, the digital renminbi is still in the pilot stage in my country, and there are many problems to be solved: First, there is not enough research on digital currency in my country’s academic circles. There is a lot of research on my country’s digital currency in the People’s Bank of China, but the extensive research in academia is not enough, especially the research on the impact of the introduction of digital currency on the existing monetary economics theory and monetary policy is not enough. Second, the international influence of the digital renminbi is not strong enough. Although the international status of RMB has been continuously improved, the share of RMB in international payments and reserves is still very low, which does not match my country’s status in the world’s economic aggregate and international trade. Third, the scale of my country’s digital renminbi is still very small. At present, my country’s digital renminbi is still in a small-scale pilot stage, and the total amount is only about 87 billion yuan, which is far from enough compared with my country’s total payment of more than 1,000 trillion yuan. Fourth, my country’s data security and payment security need to be further strengthened. How to ensure data security during the use of digital renminbi is an important issue in the implementation of digital renminbi, and it is also the key to affecting the public’s recognition and use of digital renminbi. my country has carried out very specific research on data security and digital renminbi anti-counterfeiting, but during the pilot process, counterfeit digital renminbi wallets have been found on the market, so the security of digital renminbi requires further attention. Fifth, the laws related to digital renminbi still need to be improved. Digital RMB is different from banknotes and coins. It can be endowed with more functions such as real name, traceability, etc. This is also the advantage of digital RMB. How to ensure the public’s information security from the institutional level under the advantage of digital RMB needs further efforts. think.

5. Further play the role of the digital renminbi and accelerate the construction of a new development pattern

First, further strengthen the pilot promotion of digital renminbi. The first is to further conduct pilot projects in specific regions, industries and enterprises, and find problems during the pilot process. For example, to carry out the pilot promotion of digital renminbi in the free trade zone, state-owned enterprises can be selected to use digital renminbi in wage payment. The financial sector can also be selected to carry out the digital renminbi pilot. The second is to expand the operators of digital renminbi. At present, my country’s operators have expanded to nine financial institutions, and will expand to more financial institutions including foreign banks in the future.

Second, strengthen theoretical research on digital renminbi. The launch of the digital renminbi has brought more and more theoretical questions to the academic community, including whether the monetary policy objectives will change under the digital renminbi, and the impact of the digital renminbi on the basic laws of macroeconomics, such as Okun’s rule, Phillips curve, etc. Will it be impacted, and whether the optimal monetary policy proposed by the traditional Friedeman rule (that is, the nominal interest rate is zero) still applies. For example, Mohammad Davadar Hosseini, senior economist at the Bank of Canada, pointed out that the optimal monetary policy under the central bank’s digital currency Inflation rate is strictly positive. It is suggested that the People’s Bank of China open the pilot data to the research of relevant scholars, and give targeted improvement suggestions.

Third, give full play to the advantages of digital renminbi to help my country form a new development pattern. To effectively expand domestic demand in the new development pattern, the first is to play the role of the digital renminbi to subsidize low-income groups, promote the solution of the problem of unequal income distribution in my country, and improve the consumption level of Chinese residents. The second is to take advantage of the low transaction cost of digital renminbi, reduce the cost of my country’s investment and financing fields, and effectively stimulate investment, especially focusing on improving the level of private investment.

Fourth, give full play to the advantages of digital renminbi to help my country’s macro policies be active and effective. The first is to enhance the effectiveness of active fiscal policy. The 2022 government work report proposes that “new financial resources should sink to the grassroots level, mainly to implement policies to help enterprises, stabilize employment and protect people’s livelihood”. At the same time, it requires “the central government to bring more funds into the direct scope”. Digital RMB can be used here. play a positive role. The second is to give full play to the role of the digital renminbi in the impact of monetary policy on the overall economy and structure, and guide more funds to flow to key areas in a targeted manner to expand financial inclusion.

Fifth, strengthen the layered management of digital renminbi and improve the regulatory capabilities of the financial sector. On the one hand, it is necessary to strengthen the hierarchical management of digital renminbi. In the design of digital renminbi, different amounts of funds and different entities are designed and managed in layers. Studies have shown that agents use cash in small transactions and central bank digital currency in large transactions. On the other hand, there is a need to improve regulatory capacity more comprehensively. Supervision and prudent supervision are the keys to building trust in new forms of digital currency, especially when digital currencies provided by a variety of different entities will appear in the market in the future. In addition, cross-border cooperation between regulatory agencies should also be strengthened.

Sixth, strengthen the infrastructure of digital renminbi. One is to strengthen the research on anti-counterfeiting technology and storage technology. The liquidity of digital renminbi is faster. Once counterfeiting occurs, it will have a greater impact on the economy. Therefore, the research on anti-counterfeiting technology of digital renminbi should be ahead of schedule. In addition, the storage capacity of big data will grow explosively in the future, and it is necessary to strengthen the foundation of data storage. safety of the facility. The second is to strengthen the legal infrastructure construction of digital renminbi. The digital renminbi needs to adapt to the central bank law and currency law, and also needs to clarify the status of privately issued currency from the legal level.

Seventh, further respond to the initiative of the international community, improve the cross-border payment environment, and create conditions for the internationalization of the RMB. The digital renminbi already has the technical conditions for cross-border use, but it is currently mainly used to meet domestic retail payment needs. To further play the role of digital renminbi in cross-border payments, one is to strengthen government support for the application of digital renminbi in cross-border scenarios. Actively carry out pilot projects, especially in scenarios such as the “Belt and Road” construction, the Asian Infrastructure Investment Bank and the Regional Comprehensive Economic Partnership (RCEP), to actively carry out digital RMB application pilots to explore effective paths for digital RMB cross-border payments. The second is to play the key role of the International Monetary Fund. Most IMF members, especially emerging market and low-income countries, use some form of capital flow management. Existing regulations need to be continuously improved so that capital flow management measures remain in effect after the introduction of digital currencies. Digital currency design principles need to be coordinated at a global level to ensure they meet the needs of all countries and are widely adopted, thereby limiting regulatory arbitrage, which requires the role of the International Monetary Fund.

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