China’s DC/EP to Reach Far, Two Top Global Banks Agree

From Deutsche Bank to Goldman Sachs, the prospect of China’s Digital Currency Electronic Payment (DC/EP) gaining widespread use is becoming more established going by their separate analyses on China’s market outlook.

The DC/EP, which promises to combat money laundering and other illegal activities, improve monetary and financial supervision and enable offline and more inclusive payment system for the population, will capitalize on the Covid 19 pandemic’s effect on accelerating the move to digital payments, the two top global banks’ reports seem to suggest.

In a post-Covid 19 analysis, Deutsche Bank is increasingly bullish on China’s prospects as one of “the most successful countries” in limiting the impact of Covid 19 pandemic as hopes of a V-shaped recovery is “fading elsewhere” and notes that the wading effect of the pandemic will enable China focus on achieving technological self-sufficiency and developing its central bank digital currency.

Their China Macro: October activity: revising up GDP forecast, issued on 16 November, revised up China’s real GDP forecast to 6.0% y/y in Q4 2020 (from 5.5%), and 2021 GDP forecast to 9.5% (from 9.0%) with the recent formation of the Regional Comprehensive Economic Partnership (RCEP), seen as an extension of China’s influence, being a plus to the bullish sentiment.

With its pilot testing as part of initiatives to reflect China’s aim of accelerating the development of blockchain technology while discouraging any cryptocurrency that competes with the CBDC, Deutsche Bank concludes that DC/EP could “become a widely-used reliable and low-cost payment method” though as a highly centralised system with near-field communication (NFC) base which can be taken entirely offline and available to China’s unbanked communities thus enabling them to transfer money without having to use the internet.

The success of the DC/EP could see China be one of the first countries to issue a sovereign digital currency that will “eventually replace physical cash” with embedded similar characteristics like anonymity and ease of use, Goldman Sachs adds in its latest Goldman Sachs report on China Financial Services. The investment bank notes, as another aboption indicator, that the conversion of household deposits to DC/EP wallets will not result in banking-sector disintermediation and most transactions will be small – a complement to the “(u)se of cash at the point of sale and the M0 to M2 ratio in China (which) is already among the lowest globally.”

The report also expresses in the report the belief that DC/EP will become “the third pillar of China’s payments system alongside banks and fintech and by 2029 “account for 15% of total consumption payments (TPV of Rmb128tn) as fintech market share tapers off (albeit still dominating the space) and usage of cash and physical bank cards shrink.”

“In the early stages, DC/EP will primarily facilitate small payments for consumables such as meals, groceries and transport. However, as safety, security and functionality improveover time, applications will expand to larger and more complex, value-added servicessuch as traceable government subsidies and cross-border payments.
“In ten years we expect DC/EP to reach 1 billion addressable users, Rmb1.6tn(US$240bn) in issuance, Rmb19tn (US$3tn) in annual Total Payment Value (TPV)and Rmb162bn (US$24bn) in annual cost savings…”

Other highlights of their reports includes that hopes are raised of a return to pre-pandemic levels by H2 2021 and extending into 2022 and 2023. The yuan’s 6% gain against USD (since May) may likely remain so as 2021 comes marking the opening of China’s 14th five-year plan in which a review of ways to encourage foreign investment and developing new projects under the Belt and Road (BRI) initiative launched in 2013 is scheduled.

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