Internationalization of the RMB: Can the E-CNY lead the regional monetary landscape in a pragmatic way forward? 

By Mathilde Barge

Abstract 

China is actively advancing digitization in East Asia with investments and the E-CNY, a new digital currency. Domestically, it aims to assert state control over monetary and non-monetary relations. Internationally, it seeks legitimacy by participating in regional deals, like Bangladesh's recent agreement with Russia. However, the E-CNY's role in transactions makes it more of a third option than a true challenge to the dominance of the dollar in trade. Can the E-CNY find a pragmatic path forward and avoid becoming a tool for questionable regional transactions?

Background 

For the past six years, China has proclaimed its e-money as the new digital ledger for Chinese citizens. This new currency's objectives were to enhance financial inclusion, support the retail payment infrastructure, compete with Western players, and offer the possibility for international transactions (PBoC, 2021). Developed by the People's Bank of China (PBoc), in practice, this new digital currency is meant to be a substitute for cash in circulation, but in reality, it showcases the desire to challenge both a domestic and international monetary landscape. In this way, the digital fiat currency embodies different meanings simultaneously, drawing a pragmatic lens on money (Ortiz, 2023). Using a pragmatic lens, this piece will argue that here money is simultaneously a strong show of domestic power to its near allies and far contestants, as well as proof of a challenging pathway toward legitimacy. 

Domestic landscape 

Domestically, China has the ability to develop a digital currency through a strong interconnected ecosystem that uses monetary links to forge social relations (Ortiz 2023). China's domestic monetary market is dominated by a small oligopoly of companies that shape digital connections through various financial and non-financial services on their app. These digital connections include short-term credits, insurance contracts, investment funds, and social media, linking the biggest apps with the most flows of interpersonal data. Two apps control 93% of the flow of data in the country: namely, Alipay through Alibaba (55%) and WeChat, which is owned by Tencent (38%) (Ortiz, 2023). In 2023, the penetration rate of digital payments within the population was 87.5% (Statistica, 2023), which makes data processing faster, as the algorithms are interconnected. As these apps have established banks but also work as systems of real-name identification and vaccination passes (Ortiz, 2023), these big tech companies act as brokers for the financial system and the state as they leverage real-time data. In this way, social credit scoring is born out of the social hierarchization possibilities that this interconnectedness allows for. Ultimately, by enabling credit scoring, institutions transform non-monetary relations into monetary ones, which could reinforce social discrimination.

The controlled triptyque

Thus, the triptyque that is created between the state, big tech, and financial institutions is one heavily managed by Big Tech, and the E-CNY could be a way for the state to reassert its power. Using a single-tier and a two-tier payment infrastructure model allows the users to download the government app or use other banks that are part of the pilot through their Alipay account (Van Der Liden, 2023). This gives the user flexibility and broader use of technology other than Alipay or WePay, for example, blockchain for smart contracts (Technology Review). Moreover, compared to other applications, there are no fees and the unique ability to have users transfer funds even while offline, showcasing a desire for more financial inclusion. Ultimately, the E-CNY has access to more user information than big tech does, and compared to other E-CNYs worldwide, it knows that it is user-accepted as a mutually reinforcing tool for consumers and local economies (Rabe and Kostka, 2023). This desire to regain control over money shows the plural meaning of monetary transactions as establishing links of trust between citizens and monetary institutions, which is a place where the state wants to be reinstated. New regulations on financial services since the end of 2020 (Ortiz, 2023) have reduced the profit margins of big tech and given more tools for the state to act as a supervisory actor.

However, while the state has showcased its ability to digitize its money, the E-CNY does not challenge the use of other digital payment tools and has been unable to show real domestic monetary creation. It currently has 260 million users and 13,61 billion RMB in circulation, representing persistently low adoption numbers compared to its competitors (Kumar, 2022). According to Chorzempa, the E-CNY does not challenge Alipay and WePay in terms of use, but it serves as a pilot. At the same time, the system stays in test-and-learn mode domestically and is used for the state to experiment with digital assets (2022). This has already increased short- and long-term liquidity by reducing reserve ratio requirements (Bloomberg, 2023). Thus, the E-CNY  could be a way for policy experimentation by the CCP. It could also be used to release more money domestically while creating an internationalized model, thus achieving a balance between more liquid assets

An internationalization instrument 

Ultimately, while digitalization does not explicitly represent an internationalization process, it is intrinsically geopolitical. As a central element of competition, digital payments can be a way to reshape legitimacy. RMB payments have increased in the last few years with the creation of China's Union Pay, the third largest card payment, also partly responsible for the origin of the Cross Border Interbank Payments System (CIPS) (Union Pay, n.d). This instrument is meant to settle transactions across borders; the volume has more than doubled since 2020, with direct and indirect participant numbers increasing (Kumar, 2023). There have also been other initiatives such as the RMB-denominated bonds, also known as "dim sum bonds," and Free Trade Zones (FTZs) that can be used as clearance systems. These clearing centers have allowed for increased bilateral currency swap agreements.

All in all, such instruments allow for more trust and reliability in the RMB and the creation of cross-border tools (Kumar, 2023). As the Chinese state creates digital infrastructures that can be exported outside, it shapes the internationalization of the E-CNY through close and controlled trade deals. While this is a problem for liquidity in the long term, in the short term, it allows state control and show of regional hegemony.

E-CNY as a third way or as a doomed asset ?

The creation of advanced infrastructure, such as the MultiBridge project, testifies to the use of digitalization of the RMB to counterbalance US reliance in the region (Bank for International Settlements, 2022). MBridge is a project that joins the central banks of Thailand, China, Hong Kong, and the United Arabic Emirates to connect their digital money to the same infrastructure. More than half of the transactions were conducted in RMB due to the E-CNY system's automatic use (Kumar, 2023). Thus, here, the legitimacy of the E-CNY is reinforced through its infrastructural investments and an asset capable of stimulating large cross-border payments. An example of this is Bangladesh's $300 Million RMB transaction with Russia for a power plant (Bloomberg, 2023). At the same time, as Russia has been banned from SWIFT, it has been using RMB for its foreign transactions. This coined the term "low threshold" internationalization of the RMB (Kimani, 2023), showcasing that by focusing on developing monetary hegemony in bilateral as well as regional trade agreements, China was able to reduce its reliance on the dollar. Here, this movement towards de-dollarization has thus been enabled by an ability to export the Chinese E-CNY model outside to support regional projects, but also as an unintentional move by actors to avoid sanctions coming from the US. In fact, whether it is India, Bangladesh, or other actors, e-yuan transactions have been utilized to effect transactions such as oil deals, strategic minerals deals, etc. In this way, the E-CNY and the infrastructures that were built from it act as third ways for international actors to counter both sanctions and the loss of some monetary legitimacy. Whilst this enables counter-US reliance, it also puts the E-CNY at risk of being sanctioned, rejected, or delegitimized in the future. 

Conclusion

All in all, the E-CNY showcases the state's ability to reinforce its domestic hold and create regional links through apparent digital hegemony. Thus, it can modify monetary creation within different geopolitical situations and be used both for regional deals and as a ledger for domestic smart contracts. This ability to closely control a domestic sphere and to influence an international one has centered the debate on threats to "dollar dominance" (Sullivan, 2023). However, RMB internationalization is blocked by the absence of deep and liquid financial markets (ADBI, 2012), and is still threatened by the possibility of sanctions coming from the US. In this way, the ability to modify monetary creation by increased control slows the internationalization process. Moreover, the increase in the valorization of US dollars amidst the BRICs' Summit shows that the use of the term "de-dollarization" should still be taken with a grain of salt. Ultimately, maybe the debate should not be about the threat to dollar dominance but to the ability of the E-CNY to achieve a pragmatic view of monetary creation. The real question should be: Can the E-CNY achieve a pragmatic way forward and not fall into solely being a doomed asset for shady regional deals?

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