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30 Dec 2022  (569 Views) 
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Central bank digital currency


How is e-CNY different from RMB?
China introduced the e-CNY as a central bank digital currency (CBDC). It has the same value as the RMB that is kept in bank accounts and e-wallets (e.g. AliPay and Wechat Pay).

Why does China introduced the e-CNY when they can promote the use of RMB, which is widely used as a digital payment. 

I might have found the answer.

e-CNY is technically a different currency from the RMB. While it has the same value now, it may have a different value in the future. 

What is the purpose?

The e-CNY is intended to be a currency for international trade. While it is being used domestically now, it is intended primarily to test the platform. Within China, the main form of digital payment will be the RMB in the e-wallets.

How can China promote the use of e-CNY for international trade?

1. For a start, China can ask its exporters to price its products in e-CNY, instead of USD or as an alternative to USD. The price in e-CNY may be slightly more attractive than USD, so that the buyers will opt to pay in e-CNY.

2. China will ask other countries to accept payment for their exports to China in e-CNY. This has already happened with the energy imports from Russia and the Middle East. This will be extended to other imports into China.

3. The exporters who receive the e-CNY can convert them into USD or keep them as e-CNY deposits. The China banks will offer interest on the e-CNY deposits that are as attractive as USD. This will encourage the foreigners to keep the money in e-CNY, instead of USD. They can use the e-CNY to pay for exports from China. 

4. China may offer convertibility of e-CNY into gold. They do not need to offer 100% convertibility. A convertibility ratio of 20% would be attractive, as USD does not have any convertibility. This convertibility applies only to e-CNY and not RMB.

5. When the e-CNY becomes more attractive than RMB, the individuals and businesses in China may opt to convert their RMB into e-CNY. It is likely that China will set a limit on the amount of e-CNY that can be held by these individuals and businesses.

6. Some time in the future, the exchange rate between e-CNY and RMB may not be parity. It is possible that the e-CNY will have a higher value compared to RMB, as it is driven by supply and demand. 

Some people think that China introduces the e-CNY to be able to track the payment made by individuals. I do not agree. If this is the intention, China already has the ability to track the digital payments that are now made through RMB payment platforms.

This is my personal opinion and forecast for the future trajectory of e-CNY. I will watch if it happens as I describe.

Tan Kin Lian

 


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