Economic Expert Explains Why China Should Take the Lead in Digital Currency

Yao Yudong, former head of the Research Institute of Finance and Banking of the People’s Bank of China (PBoC), urges the test run of central bank-backed DCEP (Digital Currency Electronic Payment) in the Guangdong-Hong Kong-Macao Greater Bay Area, which will be very helpful for promoting the internationalization of Chinese Yuan.

In his latest report on the new monetary theory, Yao points out that the demand for money is on exponential growth, while the expansion of the economy’s assets is on linear increase. On this basis, he drew a series of conclusions – global circulation is insufficient, inflation is moderate, debt is uncontrollable, the dominant currency will eventually appreciate, fiscal policy is mainly to ensure full employment, and China has sufficient policy space in the future.

“The RMB (Chinese national currency) is already an international currency. In the future, the weight of RMB in the international market will gradually increase. It is difficult to catch up with the US dollar, but it is expected to catch up with the euro in the future. As an international currency, the yuan will appreciate in the future.” said Yao.

Digital currency a significant supplement to the reduced global liquidity

Yao further pointed out that since the demand for money is on exponential growth, the new monetary theory (NMT) believes that global liquidity shortage will be the ultimate outcome. “A global liquidity squeeze will be the norm in the future, with increasing deflationary pressures, not inflation.”

In such a context, digital currency is a significant supplement to global liquidity. Instead of relying too much on the IMF’s issuance mechanism, Yao believes innovation of digital currency such as eSDR would be a good attempt.

“As the world is in urgent need of digital currency, I suggest the Greater Bay Area pilot digital currency first.”

China’s central bank Digital Currency Electronic Payment (DCEP)

The DCEP, the national digital currency of China, has reportedly been ready to roll out after five years in the making. Pegged 1:1 to the Chinese yuan, the overall objective of the currency is to increase the circulation of the yuan and its international reach.

According to details disclosed, DCEP will be distributed to commercial banks and later to large fintech companies instead of directly issuing to the public. It is designed as a replacement of the Reserve Money (M0) system, cutting back the cost and friction of bank transfers, and mainly face retail scenarios.

Differing from most mobile payment like Alipay and WeChat Pay, DCEP will have NFC-based payment options that don’t require devices to have internet access in the transaction. In addition, it doesn’t require the mobile device to be bound to a bank account, which means those unbanked could also have access to digital currency. In this sense, the DCEP is expected to extend around the Belt and Road Initiative (BRI) countries where a large number of the population there are still unbanked or underbanked. Data shows that China’s trade volume with BRI countries has surpassed $6 trillion over the past six years.

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