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How can China use Digital Yuan for import and export?

The country is just a few steps away from establishing a new financial paradigm where the digital currency, digital yuan, could be used in import and export. The impact of this potential game-changer on global trade will be far-reaching.

You can learn more about Digital Yuan by clicking here.

According to current definitions of Central Bank Digital Currency (CBDC), these are virtual currencies issued by central banks, circulated in parallel with physical legal tender, and backed by a nation’s wealth, such as gold reserves or foreign exchange assets.

Recently there were reports that if the CBDC is issued by the People’s Bank of China (PBOC), it will represent the equivalent value of yuan held in banks’ deposit accounts with the PBOC. Now PBOC has launched digital yuan (also known as “digital currency” or “e-money”) pilot projects.

It means the virtual yuan will be fully operational, just like the traditional yuan. It is expected that from 2023, all e-money transactions will be executed by the user via digital media.

The China-IMF study suggests that the digital yuan should fulfill three roles: an exchange medium for payment, a settlement system for financial transactions among banks, and a clearing currency in the trade settlement system.

Of course, it will be challenging to implement the three functions mentioned above with the current PBOC CBDC policy. Central banks take a long time to introduce new technologies, which are usually not beneficial for the whole banking industry and consumers.

China giving tremendous efforts to integrate the digital Yuan

China has started efforts to boost the growth of its digital economy by using e-money as a payment method. For example, WeChat Pay and Alipay are two common mobile payment apps supported by many banks in China. These two payment apps can be used in domestic and cross-border digital yuan payments. The wide acceptance of the digital yuan is also evident in cross-border trade among Chinese consumers.

The technology behind digital Yuan

Digital currency is virtual money traded by a user on Internet platforms like mobile apps or e-commerce websites. It is created by a third party and issued by Central banks such as PBOC to make payments between the real economy and the virtual world.

Users can also use digital currency to pay for goods and services in the real economy, both within and outside China, including cross-border trade. The benefits of digital yuan from China’s perspective:

Reduced transaction costs: Transactions involving digital currency are much faster and simpler than physical cash.

As the central bank continuously issues new money to keep the virtual economy steady, many users will buy these currencies, making it easy for traders to convert yuan into digital currency and trade goods on Internet platforms.

No counterfeit notes: The issuance of digital currency is traceable, which could prevent counterfeit money. It could also help banks, enterprises, and the government tracks the cash flow.

Digital payment methods are more convenient: The user cannot hack the currency issued by the central bank, and it is protected by intelligent chips so which could also improve personal safety for consumers.

More efficient monetary policy operation: The new form of digital currency can support monetary policy operations as it allows better control of the money supply. It can be used by the user to ensure the stable flow of money and promote the internal economy.

Besides, it could also solve banks’ liquidity and money supply problems.

Digital currency could support enterprise development: Under the new digital economy, enterprises have promoted technological advancement to improve productivity and efficiency.

People can use digital currency to enhance efficiency and control costs to help enterprises develop capital efficiency.

Changes in fiscal policy operation: Digital currency has good monetary policy operation characteristics so it could play a vital role in budgetary policy operations such as tax collection, government finance, budget management, and social security.

It can also improve the credit structure of the bank’s credit risk management system.

Stimulate economic development: Digital currency will significantly promote the economic growth of China. It can encourage more enterprises to participate in digital innovation and boost the sustainable development of Internet finance.

Digital currency could become a new channel for trade settlement within a short period after its launch.

In other words, it can be applied by the user in actual trade between enterprises or individuals in China and overseas, which will benefit businesses that could save time and cost during trade settlement.

It benefits Chinese traders who do business with their foreign counterparts with payment terms by letter of credit or open account financing instruments that are mostly slow, inconvenient, and risky in cross-border trade transactions.

 



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