Key View China’s push for wider use of blockchain is not an endorsement of cryptocurrencies, but rather attempts to push for wider adoption of the technology across industry.The country’s digital yuan is not a form of cryptocurrency, but simply a digitalised version of the physical currency, which will still be distributed through conventional banking channels.
In an October 2019 speech, Chinese President Xi Jinping endorsed blockchain as one of China’s ‘core’ technologies, and has called for more research, support, and investment to support his country’s push to become a world leader and ‘rule maker’ in the technology.Following the speech, the price of Bitcoin surged as much as 26%, as investors took the announcement as potential indication that Beijing could reverse its stance toward cryptocurrencies; the Chinese government in September 2017 banned initial coin offerings (ICOs), and cryptocurrency exchanges from operating locally – a move which shifted trading to offshore locations which do not outlaw trading of digital currencies namely Singapore, Hong Kong, and South Korea.
What Blockchain Means To China
In our view, the speech does not suggest a policy shift on cryptocurrencies, which operate largely on the decentralised ledger system.Rather, the government is elevating the status of blockchain to increase its adoption across industry, particularly with regards to the Industrial internet segment.
The rhetoric also aligns closely with China’s earlier-announced technology growth plans, namely Internet Plus, and other industrial technology schemes, including its action plans on artificial intelligence (AI), and Made In China 2025 .Blockchain has significant potential to be implemented the food and drink , retail , agribusiness , and mining industries, as our analysis shows, and we expect the government, through targeted investments and subsidies to champion state-linked technology players to develop the technology for use in industry, like it has done most recently with 5G.President Xi in his speech highlighted supply chain management, food safety, and financial risk management as areas which could benefit from the adoption of blockchain-led solutions.Market Warms To Xi’s Announcement, Then Cools Bitcoin (BTC) – Last Price (USD) Source: Bloomberg, Fitch Solutions
In December 2019, the Chinese government formed a state-backed blockchain alliance, which will count blockchain consulting and research provider Huobi China as one of its founding members; the alliance will purportedly look at implementing a national blockchain service infrastructure which will be utilised across public service organisations and institutions.
Huobi together with social networking platform Tianya Community Network Technology also announced a USD1bn fund to finance domestic blockchain-related start-ups.Further, in October 2019, the Guangzhou municipal government announced the launch of a CNY1bn (USD140mn) fund aimed at funding domestic blockchain projects.
China’s Digital Yuan – Not Exactly A Cryptocurrency
Chinese media had long speculated that the country’s digital currency, officially named Digital Currency Electronic Payment (DCEP) would be launched by the Single’s Day annual shopping festival on November 11 2019.However, the People’s Bank of China (PBoC) stated in September 2019 that it had no concrete timetable on the launch of the currency, which has been in development since 2014, and that more trials and assessments had to be conducted, despite a month earlier claiming that the currency was ‘almost ready’.Reportedly, the central bank has already begun ‘closed-loop testing’ of the digital currency, simulating payment scenarios with the private sector.While the new digital currency has regularly been conflated with other cryptocurrencies, China’s ‘digital yuan’ will likely be vastly different from other cryptocurrencies on the market such as Bitcoin, as well as Facebook ’s proposed Libra cryptocurrency.The new Chinese digital currency will: Not substitute the Chinese yuan, but complement it.The digital yuan will be pegged to the physical yuan, unlike other cryptocurrencies, which are allowed to freely float in the market.This is also unlike Libra, which is a ‘stablecoin’ and pegged to a basket of international currencies with different weightings (50% US Dollar (USD), 18% Euro (EUR), 14% Japanese yen (JPY), 11% British Pound (GBP), and 7% Singapore Dollar (SGD).
Unlikely be decentralised, and will be run on infrastructure maintained by the PBoC.The central bank may, however, still choose to use blockchain technology, albeit in a privatised and permissioned format – this type of setup is commonly referred to as a ‘federated’ setup.The central bank will likely use the DCEP as a means to increase its oversight on money supply, and to regulate capital distribution.Cryptocurrency trading was banned by Beijing in 2017 partly due to the ability of digital currencies to help Chinese citizens circumvent currency controls and move money offshore.The PBoC, has, however, stated that, with the digital yuan, it will balance privacy concerns and the need to obtain information.
Be issued to retail banks, meaning that banks will remain intermediaries, rather than the PBoC holding on to customers’ deposits.These banks will then distribute it for use by customers, very much like how physical currency is issued now.The digital currency, however, can be used by tourists.
In a November 2019 announcement, the PBoC stated that the DCEP can also be decoupled from the banking system; In the near term, be largely used in retail transactions.The digital yuan can be stored in a digital wallet, with the PBoC highlighting that it will be made available on popular payment apps including Alipay and WeChat Pay , which will serve as wide-scale distribution channels for the digital currency.Chinese electronic payments provider UnionPay is also testing the integration of the digital yuan on its platforms for retail purchases, corporate banking, and cross-border payments.
The ease of distributing a digital currency, as opposed to a physical one will likely lead to increased use of the yuan globally, particularly with goods trade.While increased use of the yuan will afford China some political clout in the long run, widespread adoption, or its rise to become the world’s reserve currency still remains a distant possibility.The yuan still suffers from tight capital controls, namely in non-convertibility on capital accounts, and its managed-float regime, making it less appealing relative to the US Dollar, and its free-float regime.The PBoC still needs to contend with integrating its digital currency, and its accompanying technical standards, with the payments systems of other countries.
Alternatively, it could seek to develop an international clearing house for the Chinese yuan to challenge SWIFT , which has increasingly ceded to US demands for greater supervision over transactions which passes through its system.However, such a move is unlikely to gain much traction globally, given that the yuan only accounted for 1.65% of international payments in October 2019.Yuan Trails US Dollar, Euro By A Country Mile Selected Currencies – Market Share In International Payments (%) Source: Wind, Fitch Solutions
This article from Fitch Solutions Macro Research is a product of Fitch Solutions Group Ltd, UK Company registration number 08789939 (‘FSG’).FSG is an affiliate of Fitch Ratings Inc.(‘Fitch Ratings’).
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