Hong Kong can play a bigger role in renminbi internationalization

Many cities on the Chinese mainland launched digital yuan (e-CNY) promotion activities worth over 180 million yuan ($26.1 million) in total to stimulate consumption during the Spring Festival holidays. These promotion activities put the digital yuan in the limelight again.

The People’s Bank of China launched digital yuan wallet apps for Android and iOS in early January 2022. China’s digital yuan, also known as Digital Currency Electronic Payment (DCEP), is a central bank digital currency (CBDC). A CBDC is a new form of central-bank money accessible to the public, accepted as a means of payment, as legal tender, with safe store of value for all citizens, businesses, and government agencies. The major economy leading the CBDC race in Asia (and the world) is China. 

The Hong Kong Special Administrative Region, through the Hong Kong Monetary Authority, is currently engaged in three CBDC-related projects: the digital yuan (trial use tests in the special administrative region for cross-border transactions); the mBridge Project; and the electronic Hong Kong dollar (e-HKD).

The e-CNY presents many advantages such as promoting financial inclusion, no interest, low cost, payment and settlement, controllable anonymity, security, dual offline payment, etc. Furthermore, since mid-June, China’s digital yuan can now be used for wealth management products and bank loans. This move by China’s central bank extends the use of the digital currency beyond the purchase of consumer goods. In addition, China Construction Bank Corp now allows customers to use the e-CNY for wealth management products on its mobile app.

While China’s digital yuan will be beneficial in many different ways, one of the areas where it can bring more value is that of promoting the use of the yuan for cross-border payments, by diverting some of the US-dollar-denominated international trade transactions into renminbi-denominated ones; thus the proliferation of yuan-denominated transactions is considered by some to be challenging the dominance of the US dollar in international trade and finance.

This will not happen overnight, but if there is enough penetration and acceptance of the digital renminbi in a separate jurisdiction or region, it is conceivable that a trade and finance system parallel to the US-dollar system can gain critical mass, a system that can allow certain countries to bypass the global banking system and US sanctions.

Indeed, there were high hopes for the renminbi’s internationalization in the early 2010s, but results to date have been mixed and even slightly disappointing.

One the one hand, the renminbi is among the top five most-used currencies in global payments according to the SWIFT messaging system, up from the 35th position in October 2010. The share of renminbi payments rose to a record 3.2 percent of international payment settlements in January 2022, breaking the previous record set in 2015.

On the other hand, if we analyze these numbers in much more detail, we can see that the renminbi has a long way to go before it can challenge the status of the US dollar. According to SWIFT, in October the greenback was the top currency used in global payments with a 42.1 percent market share, followed by the euro (34.4 percent), the British pound (7.85 percent), the Japanese yen (2.96 percent) and the renminbi at 2.44 percent, its lowest point in a year.

Even though the same factors that hinder the internationalization of the physical renminbi nowadays — i.e., capital and foreign exchange controls — also apply to China’s CBDC, the physical renminbi has specific cross-border applications, as does the digital yuan, regardless of these hindering factors. The e-CNY may consequently be able to boost the global wholesale use of the renminbi.

To me, countries participating in the Belt and Road Initiative (BRI) are the best potential markets for China to start internationalizing its digital yuan, alongside Regional Comprehensive Economic Partnership (RCEP) countries. 

The BRI is currently a major program for China, and consequently it is perfectly possible to imagine how important the expansion of the digital yuan can become for China within the Belt and Road.

This is in line with what I mentioned in my China Daily column, Regional Trade Pact will Pave Way for Digital Yuan, published online, Feb 8, 2021, in which I said that the RCEP, signed on Nov 15, 2020, will undoubtedly pave the way for China’s new digital yuan expansion throughout Asia. Through the RCEP, China will strengthen its trade ties with neighboring countries and also be able to leverage agreement to facilitate cross-border adoption of its digital yuan to benefit consumers, dealers, bankers and industries across regions.

Focusing on Hong Kong, the special administrative region can play a key role in helping the yuan to internationalize, given its competitive advantages as the world’s largest offshore renminbi center and its “one country, two systems” principle, the cornerstone of the city’s capitalist system. In this sense, renminbi deposits in Hong Kong had exceeded 800 billion yuan by 2022. According to SWIFT, more than 70 percent of global offshore renminbi payments are processed in Hong Kong.

In addition to this, Hong Kong has played a key role in testing the digital yuan for cross-border payments, and is currently involved in other CBDC projects such as the mBridge Project, which is the largest cross-border CBDC project, launched jointly by the BIS Innovation Hub and the central banks of China, Thailand and the United Arab Emirates, and the Hong Kong Monetary Authority. MBridge aims to build a common platform for efficient, low-cost cross-border digital payments.

The digital yuan tests in Hong Kong were indeed very important for China, since China had been mostly focused on domestic-use cases for its DCEP, facilitating consumers’ retail payments; but the testing and subsequent adoption of the digital yuan in Hong Kong, which is and will remain one of the major financial hubs in the world, was a great first step to enhance the renminbi as a payments currency in the global financial system.

To sum up, the e-CNY may be able to boost global wholesale use of the renminbi, and the BRI can be a perfect platform on which to do so. While facilitating cross-border adoption of the digital yuan, such economic exchanges in the same way will help any other CBDCs in Asia. Moreover, Hong Kong can play a key role in helping the renminbi to internationalize, given its role as the world’s largest offshore renminbi center, thanks to its advantages with “one country, two systems”, and its expertise in CBDCs, as demonstrated by its digital yuan tests for cross-border payments and projects like mBridge and the e-HKD.

The author is a fintech adviser, researcher and a former business analyst for a Hong Kong publicly listed company.

The views do not necessarily reflect those of China Daily.