In terms of technological readiness, the digital yuan (e-CNY) has become a viable option for cross-border payments. Hong Kong is the main pilot area, albeit the usage of digital currency remains small in scale.
This is partially due to disruption caused by COVID-19, which prevented mainland tourists from freely visiting Hong Kong, and vice versa. Stronger capital control post-COVID-19 has hindered the prospects of large-scale adoption. We conducted a back-of-the-envelope calculation and estimated the potential size of cross-boundary payments between the Chinese mainland and Hong Kong may reach US$19 billion by 2023 and US$28 billion by 2025. With a strong policy incentive to promote the renminbi as an international currency, the use of the digital yuan may be further extended to trade finance and investment.
According to the Atlantic Council, a US think tank, 114 countries and territories, accounting for 95 percent of the world’s GDP, were already working on central bank digital currencies by January 2023. China’s e-CNY was the most-issued and actively transacted to settle cross-border trades in 2022, according to a Bank for International Settlements report. Yet the application remains limited despite the policy push. In 2014, the People’s Bank of China (PBOC), China’s central bank, began developing its own digital currency. In October 2020, e-CNY payments were first trialed in Shenzhen and then expanded to 17 regions in China by February 2023. The e-CNY is essentially digital yuan, equivalent to cash. So far it has been mainly used for domestic retail payments such as electricity and gas bills, restaurants, public transportation, shopping and government bills.
The e-CNY is distributed through the commercial banks before it reaches consumers, similar to physical renminbi. Users can download the app for e-CNY and then link it with their third-party e-wallets. It’s usually conveniently listed along with Tencent’s WeChat, Alipay or bank cards on the payment page as an option for consumers. The latest data suggest that e-CNY in circulation was about 14 billion yuan ($2.02 billion) by the end of 2022, quite small when compared to the monetary base, or M0, of 10.5 trillion yuan in the same period.
The promotion of e-CNY is mostly done through consumer vouchers to newly registered users. According to the Shenzhen branch of the PBOC, in 2022 the Shenzhen government had launched 73 events to promote e-CNY, spending 570 million yuan. However, local residents still prefer third-party e-wallets, which they are more accustomed to. The incentive to switch to e-CNY is low.
Hong Kong is the testbed for cross-border settlements using e-CNY. In December 2020, Hong Kong completed testing for the basic functions of an e-CNY wallet, including top-ups, payments and transfers. The next step is to broaden the scope of usage by connecting e-CNY wallets with the Faster Payment System (FPS), a real-time settlement payment system in Hong Kong.
In February 2023, Luohu district in Shenzhen organized a promotional event for e-CNY cross-border payments, taking advantage of the mainland’s reopening after COVID-19. We are likely to see much higher usage in the future as cross-border activities between the mainland and Hong Kong recover and increase.
Cross-border consumption mainly includes offline consumption such as traveling and goods purchases, and online purchases of goods and services. The credit card is the most-used means of payment. According to official data, we estimate that credit card payments accounted for 73 percent and 60 percent of Hong Kong and mainland residents’ overseas consumption respectively. E-wallets are gaining in popularity with rising mobile payments in the past decade, accounting for 80 percent of mainland residents’ payments in tier-one cities (including Beijing, Shanghai, Guangzhou and Shenzhen), according to a Mastercard survey. In Hong Kong, the share of e-wallet payments rose rapidly during the pandemic, reaching 14 percent by the third quarter of 2022, though still lagging the mainland coverage.
As a digital payment solution, e-CNY is most likely to replace e-wallets and credit cards. We estimate that with sufficient digital infrastructure, if e-CNY can replace all e-wallet payments
As a digital payment solution, e-CNY is most likely to replace e-wallets and credit cards. We estimate that with sufficient digital infrastructure, if e-CNY can replace all e-wallet payments, the potential size of cross-border e-CNY usage between the mainland and Hong Kong can reach US$5.5 billion in 2023 and US$8 billion in 2025. A bolder estimate is that, assuming e-CNY payments replace credit cards, the potential size of mainland-Hong Kong e-CNY payments may reach US$19 billion in 2023 and US$28 billion in 2025.
Digital infrastructure is essential for advancing e-CNY cross-border payments. In March 2019, AlipayHK, the Hong Kong arm of Alipay, became accessible for offline cross-border payments in the Guangdong-Hong Kong-Macao Greater Bay Area. The Hong Kong Monetary Authority has established the Faster Payment System, enabling real-time transfers between banks and third-party e-wallets.
Small businesses may benefit greatly from the application of e-CNY by eliminating transaction costs associated with banks and other online platforms. According to the Shenzhen Financial Technology Development Plan (2023-2025) issued in February 2023, e-CNY has the potential to facilitate capital flows in cross-border commerce, investment and financing, especially supply chain finance targeting small and midsize enterprises.
The current focus of e-CNY use is within China. A broader adoption across regions will no doubt increase its appeal. For example, mBridge, a wholesale clearing system for cross-border payments, was originally aiming to enable digital-currency transactions in the Greater Bay Area, where three currencies operate — the yuan, the Hong Kong dollar, and Macao’s pataca. The central banks of Thailand and the United Arab Emirates joined later. In October 2022, pilot testing was completed, enabling exchanges between different jurisdictions. Although the governance structure and currency sovereignty problems are yet to be clarified, it is only a matter of time before China expands trials into markets that rely on China for trade. Several recent developments in renminbi internationalization will lay the foundation for future use of e-CNY. China has signed clearing deals with Pakistan, Kazakhstan, Laos and Brazil in recent months. The United States’ sanctions on Russia and Iran could also speed up the process.
The e-CNY, which is both a currency and a payment system, will be rolled out globally for use in trade finance. It’s no easy task. New systems must bridge technological and regulatory gaps between different sovereign nations. The prospect of the yuan as a global currency lies in the economic strength of China and the easing of capital account restrictions. The e-CNY can make it much easier and cheaper for cross-border payments than the current correspondent-banking model, and can potentially circumvent sanctions imposed by the US if geopolitical tension intensifies. We expect many pilot projects to mature in 2023 to promote the use of the renminbi abroad, which will lay the groundwork needed for the broader use of e-CNY.
The author is the chief economist of Hang Seng Bank China.
The views do not necessarily reflect those of China Daily.