Why China Is Winning the Race for Monetary Supremacy: The Digital Yuan

Earlier this week Jerome Powell poured cold water on the hope for a digital US dollar in the near future.

As he commented at an IMF panel:

We do think it’s more important to get it right than to be first and getting it right means that we not only look at the potential benefits of a CBDC [central bank digital currency], but also the potential risks, and also recognize the important trade-offs that have to be thought through carefully.’

So, while it is highly likely that we will one day see a digital US dollar, we may be waiting a while. That is if Powell has his way.

I’m not exactly surprised by this cautious approach.

Many central bankers have shown disdain for digital currencies — like bitcoin — for years. Usually for one of two reasons: they either see them as a threat, or they naively dismiss them as a speculative fad.

Either way, they couldn’t be more wrong. Which is why we’re starting to see them come around to the idea.

Because like it or not, digital currencies are coming. And before the decade is out, I expect more people than not will be relying on them for everyday transactions.

The only question is, which currency will dominate?

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Leaps and bounds

See, while Powell is taking it slow on CBDCs, China is doing the complete opposite.

The digital yuan isn’t just real, it’s already being put to the test.

Last week 50,000 lucky Chinese people received a 200 digital yuan gift. Allowing them to test the new digital currency by making real-world transactions via an app. A test run that oversaw 8.8 million yuan ($1.86 million) spent in the weeklong event.

As far as most reports are concerned it was complete success too.

After all, Chinese citizens are no strangers to digital payments. With the prevalence of apps like WeChat Pay and Alipay dominating transactions across the nation.

Now though, this state-backed CBDC offers a new alternative. One that should present a distinct advantage for both buyers and sellers moving forward. As noted by the South China Morning Post:

Businesses reported minimal differences in processing payments with the digital currency compared to existing mobile payment products, according to reports by Chinese media, although they did note that it does not cost them an additional service fee unlike both WeChat Pay and Alipay.

Huang Yiping, a professor of economics at Peking University, said there is a fundamental difference between the sovereign digital currency and existing mobile payment services, such as WeChat Pay and Alipay, as there is “zero cost” when making payments via the digital yuan and they can be made without connecting to the internet.

It’s safe to say that China has taken a domineering lead in this CBDC race. With the People’s Bank of China even pushing to hasten the rollout as other countries follow suit.

Not the US though…which is why the dollar may soon be dethroned of its currency crown.

A new age of monetary supremacy

The idea that one day we may all be using the digital yuan probably sounds bizarre right now.

I certainly know I’d have a few reservations about it. All of which relate to the people behind the currency, and not the fact that it’s digital, might I add.

But it is hard to argue against the possibility.

After all, it is hard to argue against the convenience and accessibility of a digital currency. Especially one that is backed by the world’s second largest economy. And in a few years may be the world’s largest…

Indeed, a digital currency may even end up being China’s ticket to leapfrogging the US.

Because more than anything, a digital currency gives a central bank full control over money supply. Allowing them to forgo the need to rely on intermediaries such as banks to lend.

Take the recent trial, for example. Here is what one of the 50,000 winners said:

I received a text message every day urging me to spend the red packet [200 yuan] before the trial deadline, so I spent the entire 200 yuan in a department store last Friday.’

This kind of control to give and take away money is as frightening as it is effective. A method that not only removes the need for banks, but also allows for far more monetary influence than interest rates.

Just think about the West’s current weak inflation problem, for instance. By using a digital currency, China could simply hand out money on the condition that people spend it at a certain time in a certain part of the economy.

There is far more control in a digital currency compared to cash.

That is precisely what makes it so amazing and so scary…

Because if China does wind up taking a lead in CBDCs, then we may all be beholden to their whims. Which is why we need to start seeing the US, Australia, and every other nation taking this matter seriously.

One way or another, digital currencies are coming.

We just need to make sure we have the option to choose the right one for us.

Regards,

Ryan Clarkson-Ledward Signature

Ryan Clarkson-Ledward,
Editor, Money Morning


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Ryan Clarkson-Ledward is an Editor at Money Morning.

Ryan holds degrees in both communication and international business. He helps bring Money Morning readers the latest market updates, both locally and abroad. Ryan tackles all the issues investors need to know about that the mainstream media neglects.

Ryan is also the Editor of Australian Small-Cap Investigator, a stock tipping newsletter that hunts down promising small-cap stocks by dissecting the latest events affecting the world.

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