Hello again, In this 18th edition of the South China Morning Post – Global Impact newsletter, we will focus on what the relentless march of new technology means for the money in your pocket, specifically the outlook for China’s sovereign digital currency and what it hopes to accomplish. John Carter Senior Editor Political Economy The digital revolution will soon be coming for the bills and coins in your pocket China is experimenting with a sovereign digital currency - that is, currency that is used only electronically and is backed by the full faith and credit of the country. No need for bills and coins, all your financial transactions for which you previously used cash will be made through an app on your smartphone. Now most retail transactions in China already are done electronically, using apps like Ant Group’s Alipay or Tencent’s WeChat Pay (Ant Group is an affliate of Alibaba, which owns the South China Morning Post). But those are commercial services, charging merchants for their use, while the sovereign digital currency will be “issued” by the government, meaning it is “free” just like the paper bills with Mao Zedong’s face on them. Still, the digital currency is not meant to compete with the private payment services, the head of the programme said. The Chinese government has high hopes for its digital currency, formally known as the Digital Currency Electronic Payments (DCEP), as a means of maintaining control over the domestic financial system and enhancing the international use of the national currency, the yuan. In particular, Beijing hopes that the electronic yuan will help it ward off a financial war with the United States by substituting for the US dollar in international financial transactions, though significant progress on that front is likely to take years. DCEP is also a reaction to cryptocurrencies like bitcoin that are owned by their users and have no connection to any government authorities, and to so-called stable coins, private digital currencies like Facebook’s Diem (formerly Libra) that are backed by an existing sovereign currency like the US dollar or euro. When it was first announced in June 2019, Libra was seen as a threat to China’s financial sovereignty, prompting a new push for DCEP. China banned trading in cryptocurrencies a year earlier, even though other countries are embracing them. In October, China legalised the central bank’s digital currency and banned competitors. While all major central banks in the world are toying with the idea of sovereign digital currencies, China is well ahead in the development of its version, having started in 2016. It is now conducting a series of field tests of DCEP, shake down cruises to iron out the kinks. Major state-run Chinese banks and large US firms are joining the trials. A major trial in Shenzhen was followed in December with another in Suzhou of twice the size, with trialists expressing satisfaction with its use. And, for the first time, consumers were able to use the digital currency in online shopping. While the trials are still in their early stages, transactions using DCEP have already reached $300 million. Other major central banks are starting to take notice, with a group affiliated with the Bank for International Settlements - the international forum of central banks - calling for avoiding barriers to international transfers of digital money, though China did not participate in the group. Chinese officials are trying to reassure that DCEP is not a threat to existing national currencies. Still, interest in the subject by other central banks has prompted calls for a faster roll-out of China’s version. A major challenge for DCEP will be getting China’s rapidly growing elderly population to use it, given their general lack of sophistication with new technology. A major advantage of the digital currency is that it will allow authorities to track financial transactions, potentially helping it to curb the 1 trillion yuan (US$153 billion) in gambling money that flows out of the country each year through cryptocurrencies. There is as yet no timetable for the national roll-out of DCEP, though many expect it to come within the next two years. Then it will be time for Chinese citizens to update their smartphones so they can easily use the new DCEP app. - South China Morning Post, SCMP - Hello again, In this 18th edition of the South China Morning Post – Global Impact newsletter, we will focus on what the relentless march of new technology means for the money in your pocket, specifically the outlook for China’s sovereign digital currency and what it hopes to accomplish. John Carter Senior Editor Political Economy The digital revolution will soon be coming for the bills and coins in your pocket China is experimenting with a sovereign digital currency - that is, currency that is used only electronically and is backed by the full faith and credit of the country. No need for bills and coins, all your financial transactions for which you previously used cash will be made through an app on your smartphone. Now most retail transactions in China already are done electronically, using apps like Ant Group’s Alipay or Tencent’s WeChat Pay (Ant Group is an affliate of Alibaba, which owns the South China Morning Post). But those are commercial services, charging merchants for their use, while the sovereign digital currency will be “issued” by the government, meaning it is “free” just like the paper bills with Mao Zedong’s face on them. Still, the digital currency is not meant to compete with the private payment services, the head of the programme said. The Chinese government has high hopes for its digital currency, formally known as the Digital Currency Electronic Payments (DCEP), as a means of maintaining control over the domestic financial system and enhancing the international use of the national currency, the yuan. In particular, Beijing hopes that the electronic yuan will help it ward off a financial war with the United States by substituting for the US dollar in international financial transactions, though significant progress on that front is likely to take years. DCEP is also a reaction to cryptocurrencies like bitcoin that are owned by their users and have no connection to any government authorities, and to so-called stable coins, private digital currencies like Facebook’s Diem (formerly Libra) that are backed by an existing sovereign currency like the US dollar or euro. When it was first announced in June 2019, Libra was seen as a threat to China’s financial sovereignty, prompting a new push for DCEP. China banned trading in cryptocurrencies a year earlier, even though other countries are embracing them. In October, China legalised the central bank’s digital currency and banned competitors. While all major central banks in the world are toying with the idea of sovereign digital currencies, China is well ahead in the development of its version, having started in 2016. It is now conducting a series of field tests of DCEP, shake down cruises to iron out the kinks. Major state-run Chinese banks and large US firms are joining the trials. A major trial in Shenzhen was followed in December with another in Suzhou of twice the size, with trialists expressing satisfaction with its use. And, for the first time, consumers were able to use the digital currency in online shopping. While the trials are still in their early stages, transactions using DCEP have already reached $300 million. Other major central banks are starting to take notice, with a group affiliated with the Bank for International Settlements - the international forum of central banks - calling for avoiding barriers to international transfers of digital money, though China did not participate in the group. Chinese officials are trying to reassure that DCEP is not a threat to existing national currencies. Still, interest in the subject by other central banks has prompted calls for a faster roll-out of China’s version. A major challenge for DCEP will be getting China’s rapidly growing elderly population to use it, given their general lack of sophistication with new technology. A major advantage of the digital currency is that it will allow authorities to track financial transactions, potentially helping it to curb the 1 trillion yuan (US$153 billion) in gambling money that flows out of the country each year through cryptocurrencies. There is as yet no timetable for the national roll-out of DCEP, though many expect it to come within the next two years. Then it will be time for Chinese citizens to update their smartphones so they can easily use the new DCEP app.

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China’s digital currency: the beginning of the end of paper money? John Carter Senior Editor, Political Economy

2 January 2021 Hello again, In this 18th edition of the South China Morning Post – Global Impact newsletter, we will focus on what the relentless march of new technology means for the money in your pocket, specifically the outlook for China’s sovereign digital currency and what it hopes to accomplish. John Carter Senior Editor Political Economy The digital revolution will soon be coming for the bills and coins in your pocket China is experimenting with a sovereign digital currency - that is, currency that is used only electronically and is backed by the full faith and credit of the country. No need for bills and coins, all your financial transactions for which you previously used cash will be made through an app on your smartphone. Now most retail transactions in China already are done electronically, using apps like Ant Group’s Alipay or Tencent’s WeChat Pay (Ant Group is an affliate of Alibaba, which owns the South China Morning Post).  But those are commercial services, charging merchants for their use, while the sovereign digital currency will be “issued” by the government, meaning it is “free” just like the paper bills with Mao Zedong’s face on them. Still, the digital currency is not meant to compete with the private payment services, the head of the programme said. The Chinese government has high hopes for its digital currency, formally known as the Digital Currency Electronic Payments (DCEP), as a means of maintaining control over the domestic financial system and enhancing the international use of the national currency, the yuan. In particular, Beijing hopes that the electronic yuan will help it ward off a financial war with the United States by substituting for the US dollar in international financial transactions, though significant progress on that front is likely to take years. DCEP is also a reaction to cryptocurrencies like bitcoin that are owned by their users and have no connection to any government authorities, and to so-called stable coins, private digital currencies like Facebook’s Diem (formerly Libra) that are backed by an existing sovereign currency like the US dollar or euro. When it was first announced in June 2019, Libra was seen as a threat to China’s financial sovereignty, prompting a new push for DCEP. China banned trading in cryptocurrencies a year earlier, even though other countries are embracing them. In October, China legalised the central bank’s digital currency and banned competitors. While all major central banks in the world are toying with the idea of sovereign digital currencies, China is well ahead in the development of its version, having started in 2016. It is now conducting a series of field tests of DCEP, shake down cruises to iron out the kinks. Major state-run Chinese banks and large US firms are joining the trials. A major trial in Shenzhen was followed in December with another in Suzhou of twice the size, with trialists expressing satisfaction with its use. And, for the first time, consumers were able to use the digital currency in online shopping. While the trials are still in their early stages, transactions using DCEP have already reached $300 million. Other major central banks are starting to take notice, with a group affiliated with the Bank for International Settlements - the international forum of central banks - calling for avoiding barriers to international transfers of digital money, though China did not participate in the group.  Chinese officials are trying to reassure that DCEP is not a threat to existing national currencies. Still, interest in the subject by other central banks has prompted calls for a faster roll-out of China’s version.  A major challenge for DCEP will be getting China’s rapidly growing elderly population to use it, given their general lack of sophistication with new technology.  A major advantage of the digital currency is that it will allow authorities to track financial transactions, potentially helping it to curb the 1 trillion yuan (US$153 billion) in gambling money that flows out of the country each year through cryptocurrencies.  There is as yet no timetable for the national roll-out of DCEP, though many expect it to come within the next two years. Then it will be time for Chinese citizens to update their smartphones so they can easily use the new DCEP app.

60 SECOND CATCH-UP • Explainer: What is China’s sovereign digital currency? • Explainer: Which central bank will launch world’s first digital currency? • Video: What is cryptocurrency?

DEEP DIVES

China’s digital sovereign currency tests give it a leg up on global peers • People’s Bank of China started studying digital currency in 2014, but the pace picked up last year after Facebook omitted the yuan from a basket of currencies in its Libra project • European Central Bank warns of foreign providers taking the lead in digital currencies, while starting to examine the pros and cons of its own unit China’s central bank is moving closer to a full roll-out of its sovereign digital currency, with tests having already been conducted in pilot cities, though the formal launch date for the nation’s new digital money remains unknown. Meanwhile, other major central banks are warming to the idea of digital currency, with the European Central Bank saying last week that it would begin exploring the pros and cons of pursuing its own. Sweden’s Riksbank has also been testing its e-krona for months. Read more

Toy vending machines might help China get people hooked on digital yuan • Gashapon vending machines that dispense capsules with toys based on popular anime series like One Piece and Detective Conan will help trial the digital yuan • China’s central bank digital currency has already been used in transactions worth about US$162 million Toy vending machines are a popular fixture in China’s myriad shopping centres and entertainment venues, as they help attract young consumers. China’s central bank now sees these vending machines as a means to further expand the use of the country‘s digital currency. Shanghai-based company Delfino, a unit of Japanese housing builder Okura, has been tapped to supply these so-called gashapon machines that will be installed in various areas on the mainland where the People’s Bank of China (PBOC) is conducting tests for the country’s digital yuan, according to a report by Nikkei Asian Review on Saturday. Gashapon machines distribute collectible toys. In this case, the toys include those based on popular manga and anime series like One Piece and Case Closed, also known as Detective Conan. Read more

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Bitcoin ads splash across Apple Daily, Western media as US sanctions mount • Recent adverts in Hong Kong’s Apple Daily newspaper, international media outlets and Western broadcasts encourage investors to shun banks • Cryptocurrency supporters say one advantage is that it is not subject to government pressure, but critics point to its use in illegal activities The number of bitcoin adverts appearing in major newspapers is growing as the United States steps up its efforts to impose financial sanctions on foreign government officials and companies, cutting them off from the US dollar global payment system. Most cryptocurrencies, including bitcoin, operate under a public computer network that is designed to exist outside the control of a central authority, becoming an alternative payment system to traditional banking. Read more

How the US uses global dollar payments system to impose sanctions • The US dollar’s global dominance gives Washington a powerful tool that it uses to enforce sanctions on people, institutions and countries • The decoupling of the world’s two largest economies has raised concerns about the United States deploying the ‘nuclear option’ of freezing China’s banking sector out of the global US dollar payments system The pervasive nature of the US dollar payments system along with its dominance in international transactions have afforded Washington broad powers to impose economic and financial sanctions on other countries. Upping the ante against its opponents, the United States has restricted foreign governments, institutions and individuals from using US dollars in international finance so that they are unable to receive payments for exports, pay for the purchase of goods, or own US-dollar denominated assets. Read more

To keep track of the latest developments follow our daily coverage on our website or focus on development in the digital currency here.  In our next issue, we’ll look at the prospect that the US and China will be able to cooperate on climate change policy.     We’d welcome your feedback. Email me at globalimpact@scmp.com or tweet me at @scmpeconomy. Plus, be sure to check out our Economy news feed for the latest news and analysis. We at the SCMP wish you and yours a very festival holiday and good health in the new year.  All the best,   John John Carter Senior Editor, Political Economy

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This newsletter is created and catered for the global news reader. Each issue will feature a news story originating from China that carries a significant macro impact on the rest of the world. We hope to share with you a broader perspective on the emerging topics shaping our world and that we feel are revolutionising the way we understand China.