Money and political rule in China’s history

China’s past and present provide eloquent testimony to the political significance of money and currency.¹ In the country’s long history, there are numerous examples of how “bad money” has led to political instability, the delegitimisation of political rule, territorial disintegration, civil war and chaos. It is historically proven that the early paper currencies under the Song (1127–1279), Yuan (1271–1368), Ming (1378–1635) and Qing (1636–1912) dynasties experienced deep losses in value as a result of ex­cessive monetary expansion, which subsequently undermined the legitimacy of imperial rule and contributed to its demise. The Taiping Rebellion (1851–64), which is estimated to have cost the lives of 20 to 50 million people, was also triggered by a currency crisis.²

In the period 1839–1949, which China’s official historiography refers to as the “century of humiliation”, the state’s monopoly on currency was chal­lenged several times and from different sides: initially by the branches of European banks in the coastal trading ports, then later also by local Chinese banks and provincial governments, and finally by invaders from Japan. In China’s republican era, the Kuomintang government and Japanese colonial authorities fought bitterly for national currency dominance in the years 1938–41. After Japan put the currency of the Republic of China under massive pressure by selling on foreign exchange markets, the currency war escalated in 1941 when both sides carried out attacks, acts of sabotage and even military assaults on the opposing central banks and banks.³

For China’s communist rulers, money and currency have always been an essential foundation of their rule.

It is firmly anchored in the current political culture of remembrance that China’s revolutionary changes of power in the 20th century were preceded by runaway inflation. Massive currency devaluations were followed by food riots and unrest, which were key factors in the fall of the empire (1912) and the defeat of the Kuomintang in the Chinese Civil War (1927–49). The student protests in Tiananmen Square (1989) also had a monetary component against the backdrop of high inflation (around 25 per cent).⁴ Also unforgotten are the former restrictions on China’s national sovereignty, for example as a result of the parallel existence of several currencies on the country’s territory, the uncontrolled activities of foreign banks, or the indebtedness of the state and private sector to foreign countries.

The collective memory of all these events continues to characterise the mindset and actions of the Chinese state and party leadership to this day. For China’s communist rulers, money and currency have always been an essential foundation of their political rule, comparable in importance only to the insignia of the people, army, territory, party and state. On the occasion of the founding of the central bank and the introduction of the new currency, the renminbi,⁵ Mao Tse-tung proclaimed on 1 December 1948, just one year before the proclamation of the People’s Republic of China (PRC): “The Chinese people finally have their own army, their own regime, their own land and now their own bank and currency! This is how a republic mastered by the people should be like.”⁶ The symbolic names given to the central bank (People’s Bank of China, PBoC) and the currency (People’s Money, RMB) as well as the enforcement of an RMB with stable value as legal tender in the turmoil of the civil war contributed significantly to legitimising the Chinese Communist Party (CCP) in the founding phase of the PRC.

The defensive and offensive sides of Chinese monetary nationalism

Due to this historical background, money and cur­rency are integral parts of China’s sovereignty, iden­tity and nationalism. China’s monetary nationalism has an economic and a political facet: Economically, its currency is an instrument to safeguard monetary stability and promote economic development, growth and competitiveness, if necessary, also at the expense of third countries. Politically, the RMB is an internal symbol of national identity and an external mani­festation and instrument of China’s claim to inter­nation­al leadership.

It is obvious that the monetary system is subordinate to the CCP’s interest in maintaining the system and its power in order to preserve political stability. Money and currency are core elements of politics and political power. Only after recognising this premise can their economic dimension be assessed. The political system, which describes itself as “Socialism with Chinese characteristics”, makes use of efficient market economy regulations and provides very broad scope for entrepreneurial freedom and autonomy. However, the CCP’s claim to leadership in all key political issues remains absolute.

In this type of political setting, the central bank responsible for monetary policy (the PBoC) cannot be independent. As in other centres of power, the man­agement staff of the PBoC are committed to the com­munist party and ideology. Leninist organisational principles also apply to the PBoC. From a constitutional point of view, the PBoC is a subordinate author­ity of the State Council, which is responsible for political supervision and the budget. All important monetary policy decisions ultimately require the approval of the State Council. The fact that the PBoC nevertheless enjoys a certain degree of authority and independence is primarily due to its success in ful­filling its mandate, namely to safeguard the monetary value of the RMB and promote economic growth.⁷

China’s monetary nationalism has both domestic and foreign policy aspects. On the one hand, it has a defensive inward focus for the purpose of protecting financial sovereignty; on the other hand, it has an offensive outward focus in an effort to gain inter­national financial leverage and influence.⁸ In the 20th century, during the ruling eras under Mao Tse­tung, Deng Xiaoping and Jiang Zemin, the focus was primarily on defensive aspects. China’s state and party leadership was concerned with controlling the RMB and enforcing it as the only legal tender on the territory of the PRC, securing the currency’s internal monetary value and thus the Chinese people’s trust in it. The leadership could thus avoid financial and currency crises that could have jeopardised this trust as well as internal stability while also averting any financial dependencies, be it through foreign debt or through the dominance of Western banks and finan­cial institutions in China itself.

From a Chinese perspective, a sense of vulnerability persists regarding monetary and financial policy, right up to the present day.

Although monetary and financial policy has succeeded in mastering all these tasks, a sense of vulner­ability persists from a Chinese perspective, right up to the present day. The international monetary system remains US dollar-centred and Western-dominated and could potentially be used as a political weapon against the People’s Republic. Financial sanctions, such as those imposed on Russia in response to the war of aggression against Ukraine, would also hit China’s economy hard. In addition, the Chinese econ­omy and economic policy are at the mercy of the sometimes surprising twists and turns of US monetary policy, at least as long as stable exchange rates are sought for the RMB and certain restrictions on capital movements are maintained in a controlled manner for capital transactions with foreign countries. In the not unthinkable event of a financial and economic crisis, China’s political stability or even the CCP’s claim to power could be jeopardised by rampant capital flight.

From a Chinese perspective, the offensive financial and currency policy goals that have become increasingly apparent since the turn of the millennium have therefore always had a defensive connotation. For example, the build-up of currency reserves (totalling USD 4 trillion at peak times) was obviously based on the idea of having to be prepared for speculative attacks on its own currency and a likely subsequent financial crisis.⁹ The actively pursued goal of inter­nationalising the RMB was therefore also a reaction to the turbulence on the global markets in the financial crisis of 2008/09. China’s demand for a level of rep­resentation at the International Monetary Fund (IMF) and the World Bank that is in line with the country’s economic weight is also understandable and legiti­mate. Other financial policy measures already display a clearly offensive character, such as the establishment of new competing multilateral financial insti­tutions, for example the Asian Infrastructure Invest­ment Bank (AIIB) and the New Development Bank (NDB). State or quasi-state direct investments and foreign loans made as part of the Belt and Road Ini­tiative (BRI) already testify to China’s strong economic and political dominance in regional and international contexts. The dependencies and asymmetrical power relations that have emerged as a result have become proven instruments of economic coercion in China’s foreign policy, when deemed necessary.

In the current era of government under Xi Jinping (since 2014), China’s monetary and financial policy has been characterised by an offensive approach. The People’s Republic is actively seeking to exert influ­ence, co-determination and participation in inter­national financial and monetary matters in line with its own political ideas and interests. Due to its grow­ing political ambition, it is inconceivable that China could be passively integrated into the existing gov­ernance structures of the global monetary system in the same way as the former financial policy “rising powers” Germany, Japan and Saudi Arabia, especially as the United States – supported by other G7 coun­tries – is actively blocking China from having a greater “vote and quote” in the IMF and World Bank. The state and party elites in the People’s Republic regard it as illusory that America would ever offer China a genuine partnership in the existing governance system or even respect Beijing’s core political interests. It is therefore the long-term objective of the Chinese leadership to gradually change the inter­national financial and monetary system in such a way that its own room for manoeuvre is expanded and that of America and the West is reduced.¹⁰ In the long term, the People’s Republic must endeavour to re­shape the global monetary and financial system in such a way that it is sufficiently compatible with the structures of the Chinese one-party state. China’s monetary policy and international financial policy therefore align with the country’s overriding political interests.¹¹

China’s motives

From a Chinese perspective, the internationalisation of the RMB is necessary to counteract the economic and political disadvantages facing the PRC in the current international monetary system. The worries and concerns of the Chinese leadership are primarily in three areas.¹³

Firstly, China’s companies are exposed to currency-related costs and risks – particularly substantial cur­rency risks – in their foreign trade and investments, even though the country is now the world’s second-largest economy (based on market prices) and largest trading nation. China’s domestic financial institutions and financial markets will not be able to develop in the same way as the country’s real economy for the foreseeable future. In contrast, RMB internationalisation could allow China’s citizens, companies, banks and corporations to use their own currency inter­nationally as a means of payment and investment, to raise RMB-denominated capital or to issue RMB-denominated bonds abroad.

Secondly, China is at a disadvantage due to the ob­ligation to hold foreign exchange reserves denominated in US dollars to hedge against currency and financial market crises. Beijing views these investments as inefficient, loss-making and politically humiliating. As a large economy with global eco­nomic exposure, China holds the highest level of dollar currency reserves in the world and considers itself to be in a dollar trap due to the associated asset risks, which are difficult to calculate. In the worst-case scenario, the People’s Republic would have to accept the United States offloading its monetary ob­ligations to foreign countries through an expansive monetary and fiscal policy.

RMB internationalisation would be a way for China to free itself from the dollar trap.

These three sets of concerns and the resulting commitment to change distinguish China’s project of currency internationalisation from the rather half-hearted efforts with which the former West Germany and Japan in the 1980s and 1990s – and the euro­zone since the beginning of the 21st century – sup­ported and continue to support the internationalisation of the mark, yen and euro.¹⁴

Benefits, costs and risks of the renminbi internationalisation

As politically desirable as the international upgrading of China’s own currency may be from a Chinese per­spective, it cannot simply be decreed politically. Nor does such a process only bring advantages. Currency internationalisation in general, and RMB internationalisation in particular, are associated with costs and risks.

Usually a currency can be considered international if it can be used to fulfil the primary monetary func­tions (medium of exchange, unit of account, store of value), not only domestically but also abroad, that is, beyond the borders of the issuing central bank’s juris­diction. A distinction must be made between (private) use by households, companies, banks and corporations, and the use by central banks (see Table 1).¹⁵

Using a different currency instead of the domestic and customary legal tender is a matter of trust. There­fore, currency internationalisation can only ever be a demand-driven, market-based process. Internationalisation also requires government support. In order to be accepted, the international currency should be convertible into other currencies without restrictions and should be available globally to a sufficient extent. The issuing country should therefore have open, deep and well-developed financial markets so that inves­tors can invest there at any time. Conversely, investors must also be able to rely on being able to withdraw their capital at any time. Only countries that sustainably and credibly secure internal and ex­ternal monetary stability have the prerequisites to provide a global or reserve currency.

This provision of an international currency goes hand in hand with considerable advantages for the issuing country, as a look at the United States clearly illustrates. From the perspective of the economic and political heavyweight China, the potential (five) ad­vantages must outweigh the (four) disadvantages à la longue.¹⁶

The international use of the renminbi: Barriers, approaches, measures

It is not foreseeable whether, when and how the PRC will achieve complete convertibility as is required for RMB internationalisation. Although China has made progress in developing its domestic financial sector and liberalising interest and exchange rates, capital movements abroad remain strictly regulated. It is not only interest groups such as exporters and the state-owned economy that are vehemently opposed to the liberalisation of capital movements.²⁶ Systemic bar­riers also stand in the way of the transition to con­vertibility: If one considers that, in Xi Jinping’s era of government (since 2012), China’s economy and markets have been brought firmly under the control and into the service of the party and state, it is hard to imagine that this same party and state could be prepared to expose its own economic policy to the assessments and sentiments of the international financial markets. In view of the political fear of losing control, the convertibility of the RMB is illu­sory for the time being. Without this convertibility, however, foreign investors would shy away from investing in China’s financial and capital markets, especially as the legal and regulatory framework con­ditions are also problematic. In a system of “Socialism with Chinese characteristics”, there is no reliable guarantee of the rule of law and property rights. Company data and financial information are neither transparent nor reliable. Sometimes they are manipu­lated for political reasons.

“Crossing the river by
feeling for the stones.”

Irrespective of the lack of political and institutional prerequisites, the PRC is fundamentally committed to the long-term goal of RMB internationalisation and is making persistent efforts to implement it effectively. If market forces are not sufficient to realise this plan, the supporting hand of the state is needed to stimu­late international demand for the RMB. The controlled, cautious, incremental, gradualist and politi­cally coordinated approaches that can be observed here are very similar to the those used in the reforms for macroeconomic transformation and foreign trade liberalisation. The Chinese proverb “Crossing the river by feeling for the stones” describes the approach symbolically.²⁷ The metaphor makes it clear that the path to the goal is not predetermined, but rather resembles a long process based on the principle of trial and error. It may be necessary to pause or turn back if you are in danger of losing your footing.

The approach of the People’s Republic to RMB internationalisation does not necessarily correspond with those used for the currency internationalisation of th­e dollar, mark, yen and euro. In view of the country’s unique political and economic circumstances, China is seeking its own path. For the period following the turning point marked by the global financial market crisis in 2008/09, a multi-pronged approach is recognisable: On the one hand, the aim is to develop efficient domestic financial and capital markets and gradually open them up to foreign in­vestors. On the other hand, the RMB is to be increasingly used abroad. To this end, the use of China’s own currency in cross-border trade and services is being promoted over a long time horizon, and efforts are being made to establish RMB offshore foreign markets. Politically, the use of the RMB in foreign trade is being actively promoted in China’s neighbourhood and in the Global South. Technological developments such as the digitalisation of payment transactions also offer the opportunity to make the RMB more widely used around the world. The inter­nationalisation of the RMB is therefore like a “long march”, the course and end point of which cannot be determined. What is visible is a gradual process that is being actively driven forward by China’s government and financial institutions at various levels.²⁸

RMB internationalisation – a mixed interim assessment

The currency internationalisation measures imposed by the Chinese authorities after 2008/09 have not failed to have an effect. As a result, the RMB became increasingly important internationally as a means of payment and store of value. However, this trend came to a sustained halt in the summer of 2015 due to turbulence on the Chinese stock market and the sub­sequent depreciation of the RMB.³⁷ The RMB no longer appreciated, and it was no longer worth it for market participants to hold RMB liquidity speculative­ly. However, following the relative stagnation in the second half of the 2010s, the internationalisation of the Chinese currency now appears to be gaining momentum again, as can be seen from the Standard Chartered Renminbi Globalisation Index (RGI), which has documented the process since 2012.³⁸ The RMB has been able to record gains on shares, particularly in international payment transactions and on the foreign exchange markets.³⁹

The RMB still does not play a significant role in the global financial and currency markets.

However, the data in Table 2 only provide an in­complete picture of the international role of the Chinese currency. In fact, the RMB has visibly gained status and profile in China’s foreign trade and capital transactions as well as in the regional context over the past 15 years. However, this positive development is not – or only partially – recognised in the avail­able statistics from SWIFT, the Bank for International Settlements (BIS) and the IMF. The use of Chinese and Asian sources provides sufficient empirical evidence of the regional and international importance of the RMB:

RMB as a means of payment: 18.2 per cent of Chinese trade and services were settled in RMB in 2022.⁴⁰ The natural centre of these transactions with foreign countries is in Hong Kong, with a share of 50.3 per cent, followed by other Asian financial centres such as Singapore (10.3 per cent), Macao (4.0 per cent), Tokyo (2.4 per cent) and Taipei (2.2 per cent).⁴¹ Ac­cording to Chinese media reports, RMB exceeded US dollars in China’s total payment transactions for the first time in March 2023. The RMB is accepted in cross-border payments more than elsewhere by Asian countries and in parts of Africa and Latin America.⁴² More recently, Russia, Brazil and Argentina (still under the Kirchner administration) have begun to increasingly use the RMB as a means of payment in foreign trade transactions. In response to Western sanctions, Russia has switched its international pay­ment transactions to RMB as far as possible. India, on the other hand, still insists on dollars or rupees. It is also reported that RMB cash has become the unofficial parallel secondary currency in some of China’s neighbouring countries, such as Laos, Myanmar and North Korea (“yuanisation”).

RMB as a store of value: Bonds and debt securities denominated in offshore RMB are predominantly issued in Hong Kong and held in Hong Kong bank accounts. The issuance of international bonds de­nominated in RMB, the “dim sum bonds”, began steadily increasing again starting in 2018 following a massive slump between 2014 and 2017.⁴³ However, the RMB has hardly benefited from the global trend of relatively decreasing dollar reserve holdings. Central banks are choosing to shift into gold and convertible currencies. It is likely to be mainly central banks in Asia, Africa and Latin America that are storing RMB as a reserve currency.

RMB as a monetary policy anchor: Although no country in the world has officially pegged its currency to the RMB to date, China’s trading partners are increas­ingly basing their exchange rate policies on the cur­rent exchange rates of the RMB to the US dollar. The stability of intra-regional exchange rates is an im­por­tant factor for economic stability and growth, espe­cial­ly for the countries of East and South-East Asia, which are linked by sophisticated trade and production networks. Traditionally, the common link to the external dollar anchor secures stable intra-regional exchange rates. With the rise of China as Asia’s centre of economic gravity, the exchange rate movements of the RMB against the US dollar have therefore in­creasingly assumed a guiding and anchoring function for the ASEAN states, Taiwan and South Korea.⁴⁴ In the meantime, even the exchange rates of the BRICS currencies (and those of some other countries in the Global South) correspond more closely with the RMB exchange rates than those of the Asian currencies traditionally orientated towards the US dollar. Ob­viously, an RMB currency zone emerged in the 2010s that is already significantly larger than the euro cur­rency zone.⁴⁵

Geopolitical potential for a multipolar global monetary system

The continued underdog position of the RMB in the global financial and currency markets contrasts with China’s strong position in the real global economy as the largest trading nation and second-largest eco­nomic power. It is unlikely that this imbalance will change and that China’s national currency could gain significant international weight for payment and credit transactions or as an investment vehicle. The continued adherence to restrictions on capital move­ments and market access restrictions to the domestic capital market, the persistence of current account surpluses⁴⁶ and the increasing economic problems of the People’s Republic argue against the RMB gaining status. In view of domestic debt, declining economic growth and geopolitical conflicts with America, it is unlikely that China will relax its capital controls in principle or allow high deficits in foreign trade. Main­taining macroeconomic and domestic political stabili­ty remains a priority for China’s state and party leader­ship.

Nevertheless, the RMB certainly has the potential to develop into a major international currency in the long term. A stronger role for the RMB as a globally used payment, credit and investment vehicle in the future is supported not only by China’s significant position in global foreign trade and as an economic power, but also by the widespread global unease concerning the dominant position of the dollar, America’s exorbitant currency privilege and the associated systemic risks.

In particular, the developing and emerging countries of the Global South are vulnerable in the dollar-centred global monetary system. In a world of volatile financial markets, they are repeatedly forced to take on the burden of adjusting to a US monetary and fiscal policy that is primarily orientated towards American economic and political interests. Unlike the G7 countries and America’s allies, the emerging economies do not have access to the Fed’s swap lines for short-term liquidity bridging in the event of finan­cial crises, such as the insolvency of Silicon Valley Bank in 2023. As a group, they are underrepresented in the IMF and World Bank and can only exert lim­ited influence there. In addition to the general levels of dissatisfaction, there are fundamental doubts as to whether the unipolar global monetary system, which is centred on the dollar, can be sustained in view of America’s growing national and foreign debts, coupled with the fear that the United States could be tempted to get rid of its debt through inflation and devaluation at the expense of foreign creditors hold­ing dollars.⁴⁷ The use of the dollar (and the euro, yen and pound) for financial sanctions against Russia and the seizure of the Russian central bank’s currency reserves have further fuelled unease about dollar hegemony and the Western-dominated global mone­tary system. With growing mistrust concerning America and the dollar, the RMB is becoming more attractive.

For China, there is an opportunity to promote the RMB as an alternative “emerging market currency”.

In view of the current financial, monetary and foreign policy risks, it is necessary for the emerging markets to diversify their own currency dependencies and to take precautions against the uncertainties of the current financial and monetary system. Against the backdrop of this widespread criticism of the dollar, China has the opportunity to promote the RMB as an alternative “emerging market currency”, as a kind of counterweight to the dollar. Beijing is supported in its ambitions to create a multipolar currency system and to break the dominance of the dollar by the BRICS group, which has spoken out accordingly several times in its final declarations. The call for “de‑dollarisation” has a monetary and a geopolitical component:

• In terms of currency policy, the RMB could be used to discipline America if it abuses its exorbitant privilege as the issuer of the world’s reserve currency in an exploitative manner in terms of monetary and fiscal policy. The alternatives of the RMB (and the euro) would serve as both a reinsurance and a safety net against a potentially globally destabilising American macro policy. The growing internal and external debts of the United States and its fragile domestic political situation make it imperative to take precautionary measures against a conceivable collapse of the existing global monetary system.⁴⁸

• Geopolitically, currency policy is an area of conflict in the Sino-American rivalry. Financial sanctions are an effective instrument of American foreign policy. They could cause considerable damage to China or other countries. China, which is vulnerable on this front, is arming itself by internationalising its own means of payment and establishing a currency zone centred around the RMB. It would also be advantageous for third countries to be able to switch to an alternative infrastructure for cross-border payments and an alternative currency in the event of a potential conflict with America. If the dollar and euro are problematic for a state regime for geopolitical reasons or for fear of sanctions, China could provide the RMB as an effective alternative via swap lines and help out with its CIPS transfer infrastructure. Digital central bank money could also be an interesting option.⁴⁹

From the perspective of the Global South, currency policy and geopolitical considerations may argue in favour of a multipolarisation of the international monetary system (and thus a stronger role for the RMB). Still, the RMB remains commercially unattractive compared to the dollar (and the euro), at least as long as it is not fully convertible and RMB liquidity is not sufficiently available globally. On the other hand, countries always have administrative options to in­fluence foreign trade payments. It can therefore not be ruled out that the forces of geopolitics will prove to be more powerful than the factors concerning economic cost and efficiency. Just as supply chains and trade flows are already geared towards geopolitical constraints in the present, geopolitically fragmented credit and capital markets could also emerge in the future. It is even conceivable that the global monetary system will collapse and a bipolar currency regime will emerge in which China forms its own currency zone with other revisionist states.

One open, speculative question is how China would behave as a currency hegemon. Would the People’s Republic work cooperatively and constructively with America and the eurozone? Would it be prepared to take on economic adjustment burdens and, for ex­ample, open swap lines in RMB in crisis situations or grant support loans to financially troubled countries? On the one hand, China’s constructive role in past financial crises gives reason for cautious optimism.⁵⁰ On the other hand, Beijing’s restrictive attitude towards countries that are unable to repay their BRI loans suggests that China will primarily focus on its own interests. It seems unlikely that it would adopt solutions conceived in the United States.

In any event, China is single-mindedly and persistently pursuing its goal of national rise in the area of financial and monetary policy as well. Digital pay­ment systems could make it easier and cheaper to bypass the dollar and euro in the future. They could thus give the internationalisation of the RMB a new boost. China began laying the foundations for state digital money at an early stage. It will try to use its “first mover” advantage in the digitalisation of cur­rency and payment systems commercially and geo­politically on an international scale.

Monetary sovereignty under pressure to innovate

China is a technology-savvy country. New technologies are spreading rapidly in the economy and society. The party and the state regard innovation as an effec­tive driver of the country’s national advancement. Digitalisation is actively promoted. The innovations and business activities of fintech companies have long been seen as a welcome opportunity to reform an antiquated financial and banking system.⁵¹ At the end of 2022, 75.6 per cent of all Chinese (1.067 bil­lion) had internet access and 1.065 billion used a smartphone.⁵² In its urban centres, China is already almost a cashless society. According to a survey by the PBoC, 59 per cent of all payment transactions were made by mobile phone in 2019, only 23 per cent by credit card and 16 per cent in cash.⁵³

Towards the end of the 2010s, China’s regulatory authorities and political leadership increasingly realised that the innovations of the fintech industry were – irrespective of the commendable techno­logical and economic progress associated with them – undermining and threatening the monetary sovereignty of the state, that is, the sovereign power over money and currency. The emergence of private crypto­currencies and the dominance of digital pay­ment platforms have been and continue to be viewed particularly critically. The party and state’s claim to power has resulted in an absolute imperative to re­spond to the systemic challenges of the private digital economy in regulatory and political terms. The intro­duction and establishment of a central bank digital currency should prove to be an appropriate and effective strategy in the medium term in order to avoid financial risks and strengthen the state’s over­sight and surveillance capacities on the markets.⁵⁴

Private cryptocurrencies: China established itself early on as a global centre for the production and trading of bitcoins. Bitcoin is historically the first private cryptocurrency to circulate in virtual networks and accounts on a decentralised basis and independent of state control using blockchain technology. However, China’s financial and monetary authorities had no interest in the establishment of a competing private currency and the resulting erosion of the state’s mone­tary monopoly. They were therefore quick to take action against bitcoins and other private crypto­currencies.⁵⁵ As early as August 2017, the issuance and trading of cryptocurrencies, including bitcoins, was banned, and internet access to foreign crypto exchanges was blocked. Starting in May 2021, finan­cial transactions involving cryptocurrencies were completely illegal. The production of bitcoins (“min­ing”) in China was also no longer possible. Even more than the payment token Bitcoin, the Chinese author­ities perceived the plans presented by Facebook in 2019 to establish the stablecoin Libra, later Diem,⁵⁶ as a global means of payment via its own network as a threat to their monetary sovereignty. They feared that the global use of Libra/Diem in Facebook’s social net­works would further strengthen the global dominance of the dollar, and that China would also have to accept the introduction of the new artificial cur­rency (and thus the Facebook platform).⁵⁷

Thanks to the innovations of Alibaba and Tencent, China is currently the most advanced market for digital financial services in the world.

Digital payment platforms: In mobile payments, China experienced in the 2010s a unique and spectacular technological and market development, which was largely driven by the digital platforms Alipay and WeChat Pay. The two companies are not actual finan­cial service providers, but companies from outside the industry that have their origins in online retail (Alibaba) and social media (WeChat/Tencent). The two platforms have successfully expanded their business portfolios beyond mobile payment processing to include traditional banking services and offers for favourable consumer loans, insurance or lucrative investment opportunities in money market mutual funds. Their services are now used by 1.3 billion (Ali­pay) and 0.9 billion users (WeChat Pay). The innovations and investments of Alibaba and Tencent have made China the world’s most important and ad­vanced market for digital financial services. On the other hand, the disruptive changes in China’s finan­cial markets have also brought to light numerous problems and excesses: blatant cases of credit and investment fraud, growing consumer debt, inhumane working conditions, misuse of user data, insufficient data security against criminal access by third parties, unfair contract clauses, excessive fees and gagging contracts.⁵⁸

The resulting disruption in general and the commanding market positions of Alibaba and Tencent, which dominate mobile payments with a market share more than 90 per cent (2020), in particular, have prompted China’s authorities and politicians to crack down on the fintech industry with increasing severity and in many cases to utilise the police. From the perspective of the party and the state, the two companies’ digital financial services projects are not only a regulatory challenge, but also a political one. From a regulatory perspective, it is about avoiding systemic risks that jeopardise the stability of the financial market. The state and party leaders are con­cerned about the lack of transparency, the in­adequate supervision of the widely ramified shadow banking system, and the strong market positions of Alibaba and Tencent, all of which encourage abuse. The reali­sation that Alipay and WeChat Pay are ultimately digital network companies that conduct risky banking transactions without the necessary equity capitalisation could not continue without consequences. The insolvency of just one would destabilise the financial markets, not only because of the conceivable collapse of payment transactions, but also because of the re­sulting existential strains on the financial institutions indirectly exposed.⁵⁹

Politically, the level of control exercised by Alibaba and Tencent over user data, payment flows, infrastructure and technologies beyond state control was a provocation. Due to their financial power, both com­panies had also gained considerable political influ­ence. Against this backdrop, the criticism openly voiced by Jack Ma, the charismatic founder and CEO of Alibaba, in October 2020 – in which he fundamen­tally questioned the regulatory and monetary sovereignty of the state – was viewed as hubris. The IPO of Alibaba’s fintech spin-off Ant Group was can­celled at short notice at the personal behest of Xi Jin­ping. The entire fintech sector had to submit to politi­cal supervision and strict regulation as part of a large-scale campaign. All fintech companies had to register as financial market holding companies under com­mercial law and were therefore subject to the appli­cable banking regulations. New or stricter regu­lations were issued in the areas of consumer protec­tion, data protection and data security, labour pro­tection and competition. Alibaba and Tencent were required to disclose the credit ratings of their users and make them available to the state and competitors.⁶⁰

Digital central bank money – pioneer China

The central bank wants to ensure that the supply of money is also guaran­teed in the future in the event of a decline in the use of cash.

According to the white paper published by the PBoC in July 2021, China is pursuing three objectives with the introduction of the digital yuan, the e-CNY.⁶² Firstly, cash should also be made available to the public in digital form. The central bank wants to ensure that the supply of money is guaranteed by the state in the future in the event of a decline in (physi­cal) cash usage. The e-CNY is also intended to guar­an­tee access to money and cash for people who do not have their own bank account, that is, to improve financial inclusion. Secondly, the e‑CNY is intended to ensure secure, efficient payments under the con­ditions of fair competition between providers. As a form of state money, the e‑CNY is legal tender. It offers protection against data misuse by platforms and criminals, enables the interoperability of systems, and is a fallback option should one of the private systems collapse. Thirdly, possibilities for the use of the e-CNY in cross-border payments are to be explored.

China’s digital currency project started in 2014.⁶³ In 2016, the PBoC officially announced its intention to introduce digital central bank money for electronic payments (digital currency electronic payment, DCEP) and set up an internal research institute, the Digital Currency Research Institute, for this purpose. Face­book’s Libra initiative (2019) gave the CBDC project political urgency, so that the first pilot tests were launched in April 2020, initially in the cities of Shenzhen, Suzhou, Chengdu and Xiong’an.

Since then, the use of the e-CNY has been successively tested and introduced in an increasing number of regions and to ever more recipients. It is not yet clear when the e-CNY will be available throughout the country. China’s pioneering work in the intro­duction of a CBDC attests to the country’s leadership in digital technologies and payment transactions. However, it also implies considerable risks for the PBoC, the party and the state, as design flaws could lead to enormous economic damage and result in a loss of political legitimacy.⁶⁴

The white paper published by the PBoC provides detailed information on the architecture of the e‑CNY.⁶⁵ According to this information, the e-CNY is digital central bank money and legal tender. It digitally supplements and replaces physical cash in circulation with identical value (1:1). It is widely available to the general public (“retail-based”) and is intended to be interoperable with all private payment systems. The PBoC does not charge a usage fee for the e-CNY, but it does not pay interest either. The e‑CNY is issued and administered centrally by the PBoC and put into circulation via commercial banks or other intermediaries – and it is backed 100 per cent by the central bank. Users therefore do not access the e‑CNY directly through the PBoC, but via intermediaries at banks or through digital and telecommunications companies. To be able to pay with e‑CNY, users must register an electronic wallet (“wallet”) by providing their identity, bank details or at least one telephone number and then fill it with an authorised amount. The wallet can be accessed via smartphone apps, electronic watches, wristbands, chip cards and machines. The e-CNY can be used as a value-based payment token, for example for peer-to-peer trans­actions, as well as account-based via commercial and online banks. Offline transactions, between two mobile phones, for example, are also possible. Trans­actions are cleared centrally via the PBoC by means of registration, authentication and verification. Con­trolled anonymity applies: Users’ data is protected against access by merchants, banks and platforms, but it can be viewed and monitored by the PBoC in real time, for example to combat money laundering or crime. The e-CNY issued by the PBoC is not block­chain-based, but the future issuance and use of digital central bank money is fundamentally open to new technologies, so that further innovations, such as programmability for smart contracts, are conceivable.

China’s pioneering work in introducing a CBDC is testament to the country’s leadership in digital technologies and payments.

The design is very promising. However, it remains to be seen to what extent people and companies will actually accept the e-CNY in China. Thanks to inten­sive promotion, 261 million Chinese had an e-CNY wallet in 2022. However, the amount of e-CNY in circulation at the end of 2022 corresponded to just 0.1 per cent of cash in circulation in China.⁶⁶ Given the existing and convenient payment portals of Alipay and WeChat Pay, the additional use of the digital yuan makes little sense from a user perspective for the time being. It is even conceivable that the Ali­baba-Tencent duopoly will be further strengthened by the introduction of the new e-CNY money. A broader use of the e-CNY is only to be expected in connection with additional benefits that are not yet available, such as for offline transactions, payments as part of smart contracts and international transfers. On the other hand, the state could set new incentives for the application of the e-CNY or, conversely, en­force the use and acceptance of the e-CNY through laws, de­crees or other forms of state pressure.

Even if China’s public and private sectors remain cautious about the new digital means of payment, the goals set by the PBoC in its white paper are likely to be achievable. However, the white paper does not seem to reflect fully the ambitions of the central bank, the state and the party. The economic and political implications of the state’s new digital money go far beyond the technocratic level of monetary policy. With the e-CNY, China’s state authorities have a new instrument that is likely to be used in various fields, both inside and outside the country. Domestically, the e‑CNY creates new options for monetary policy and gives the state unimagined possibilities for control, surveillance and repression. At an inter­national level, blockchain technology could revolutionise cross-border payments. Chinese technology and Chinese companies could acquire dominant positions in the areas of global payments and services. An early and successful introduction of the e‑CNY internationally could sustainably bolster both the global status of the RMB and the resilience of the Chinese economy vis-à-vis Western sanctions.

New options for monetary policy

With the ban on cryptocurrencies, the introduction of a CBDC and the enforcement of platform interoperability (domestically), the Chinese government has resolutely confronted the challenges of the fintech industry. The RMB remains unchallenged as the most broadly accepted means of payment and the authoritative monetary unit of account in China. Fears that prices and wages would be expressed in foreign or digital currencies – meaning that monetary policy measures would no longer have any influence on domestic prices and economic activity at home – have receded into the background. Nevertheless, China’s monetary policy will change as a result of the digitali­sation of money and, in particular, the introduction of the e‑CNY.

Future changes will depend crucially on the extent to which and in what way the e‑CNY will supplement or even replace existing physical cash and central bank money in general. China’s policymakers, in particular the PBoC, will influence the rate at which the e‑CNY is used to shape further developments as far as possible in their favour. Despite this still un­predictable environment,⁶⁷ the extent and direction of the coming change can be recognised in outline. There are new options for monetary policy (1) due to the displacement of physical cash, (2) due to the real-time recording and programmability of a CBDC, (3) due to the possibility of direct payments by the cen­tral bank to private households and companies and (4) due to new technological possibilities for controlling capital movements. If successfully implemented, China’s monetary policy could lead the way inter­nationally.

(1) The use of cash has been declining in China for a long time.⁶⁸ The production, storage, anti-counter­feiting, distribution and redemption of banknotes and coins generate considerable costs that the PBoC would rather not have. China’s party leadership would also favour the abolition of physical money, which it sees as an instrument for money laundering, criminal activity and corruption. However, cash remains in­dispensable as a means of payment in many rural regions of China for the time being. As the intro­duction of the e‑CNY is about improving financial inclusion, the associated abolition of physical money would be counterproductive. Therefore, the PBoC’s assurances that it will neither discontinue the supply of cash nor replace it with administrative decrees as long as there is a demand for a physical means of payment are (still) credible.⁶⁹ However, if a cash ban were to be issued in the distant future – meaning that people and companies in China would no longer be able to use cash – the PBoC would have a new monetary policy option. In the event of severe reces­sions or deflation, it could levy a negative interest rate and thus incentivise private-sector spending.⁷⁰

With the issuance of e-CNY, it will be possible to record payment trans­actions, liquidity movements and lending in real time.

(2) China’s monetary policy will become more targeted and effective in the future. With the issuance of e-CNY, it will be possible to record payment trans­actions, liquidity movements and lending in real time. Monetary authorities will thus be able to obtain a precise picture of current events on the financial markets at an early stage and deploy their instruments immediately, without delay and in accordance with the circumstances. As the CBDC is traceable and pro­grammable, the PBoC will also be able to make much more targeted use of its monetary policy management instruments. Appropriate programming should make it possible to limit and control the setting of interest rates, minimum reserves and money supply quotas in terms of time, use, region and price, and to track their implementation.⁷¹

(3) It is also conceivable that the PBoC could pay out “helicopter money” to private households, for example in the form of consumer vouchers, or that it could grant investment subsidies to cooperatives and companies in order to directly and immediately stim­ulate overall economic demand. This distribution channel would have the additional advantage of mak­ing any misappropriation of funds by corrupt inter­mediaries virtually impossible. The PBoC would thus take over fiscal policy tasks, as it were. It would also be the executive organ of fiscal policy.⁷²

(4) Cross-border payment transactions with e‑CNY would create new opportunities for the PBoC to con­trol and manage capital movements and foreign ex­change reserves. Through appropriate blockchain programming, the PBoC could put itself in a position to condition or exclude certain uses of the e‑CNY, such as a sale on the foreign exchange market. The RMB could thus be better protected from speculative attacks.⁷³

Tool of control, surveillance and repression

Every transaction carried out with the new digital cur­rency e‑CNY is saved and stored in the PBoC’s central databases as part of the registration, authentication and verification process. The design of the e‑CNY thus allows for the respective wallet holder to be identified. These digital footprints are undoubtedly an expedient instrument for the Chinese state and party in the Xi Jinping era, not only to combat crime but also to secure power. The PBoC offers assurances that the e‑CNY guarantees better data security and data protection vis-à-vis private third parties compared to private payment systems, and that small amounts are not traced.⁷⁴ However, there is no data protection vis-à-vis the PBoC and the security authorities. The PBoC has repeatedly made it clear in official announcements that the principle of controlled anonymity does not mean protection from criminal prosecution. In general, surveillance and law enforcement were always important political objectives associated with the introduction of the e‑CNY. The Central Commission for Discipline Inspection – the powerful CCP organisational unit for combating corruption and ideological deviation – was involved in the digital currency project at an early stage.⁷⁵

The Chinese security authorities are permitted to access data anywhere, at any time and without restriction at their discretion.

It is possible for the PBoC to view and trace CBDC transactions in real time. As a consequence, the state security agencies will be able to use the available transaction data for surveillance, prosecutions and repression, regardless of the official assurance of anonymity. The Chinese security authorities are per­mitted to access data anywhere, at any time and without restriction at their discretion. Criminal law is interpreted broadly, and accusations of money laundering or terrorist financing are repeatedly levelled against regime critics or unpopular individuals. Party cadres who have fallen out of favour are deliberately accused of tax evasion. In addition to the ubiquitous surveillance cameras equipped with intelligent facial recognition software, digital social security cards and the “Smart Cities” project, the e‑CNY provides the party and the state with another effective digital tool for surveiling civil society and the party.⁷⁶

In the future, the PBoC will also be able to link the payment data registered in its e-CNY data centre with information from the Credit Reference Centre,⁷⁷ which is also under its administration. By virtue of this responsibility and the control it offers over financial credit, the PBoC has always been an important player in China’s social credit system. Going beyond tradi­tional credit report bureaus, the social credit system comprehensively evaluates the people and firms of the People’s Republic via a point system in order to provide incentives for socially desirable behaviour. The future role of the PBoC in China’s social credit system could go beyond the collection and processing of personal and firm-related creditworthiness data and also include executive functions. For example, in order to sanction defaulting debtors, it could block access to e‑CNY accounts for the “delinquents” con­cerned, refuse or even cancel certain payments. Or it could ensure that one is notified if the partner to a transaction is on a blacklist of “conspicuous” persons.⁷⁸

Cross-border payment transactions using e‑CNY could enable the PBoC to record transactions made abroad in e‑CNY. China’s authorities would be able to monitor, control and possibly even regulate the activities of Chinese companies abroad. Capital flight would be made more difficult. Foreigners would also have to fear that the Chinese apparatus could use the data it has obtained about them against them. It is even conceivable that the PBoC could issue a pro­gramme order to prevent e‑CNY transfers from indi­viduals or firms abroad. The Anti-Foreign Sanctions Law, which has been in force in China since June 2020, expressly provides for extraterritorial action when exercising state measures against operators and sponsors of foreign sanctions.⁷⁹ Such fears are the reason and motive for the creation of a bill in the US Congress. The “Chinese CBDC Prohibition Act”, intro­duced in August 2023 by Republican Senator Rick Scott, would prohibit American financial services companies from carrying out transactions with e‑CNY. China’s authorities would be denied access to the payment data of American citizens.⁸⁰

Cross-border interoperability in international payment transactions

Cross-border payment transfers are notoriously time-consuming, cumbersome and costly. In order to establish a secure connection between different legal, regulatory and currency environments, commercial banks, correspondent banks and at least one clearing centre must be involved.⁸¹ The World Bank put the global costs of international payment transactions for the first quarter of 2023 at 6.25 per cent of the trans­fer amounts, and for bank transfers as much as 12.10 per cent.⁸² In developing and emerging coun­tries, which often only have poorly developed bank­ing systems, the costs, time and risks of international payment transactions are particularly high.

On a positive note: CBDCs and distributed ledger technology offer promising potential for cost savings and productivity gains that would benefit the Global South in particular. Digital payment platforms could be used to process cross-border transfers via blockchains, peer-to-peer, as well as in real time while by­passing the existing banking and clearing system at very low cost, and perhaps even free of charge in the future. The more consumers and companies become accustomed to efficient payment processes, the more politicians and central banks will come under pres­sure to enable cross-border digital transactions and the cost reductions that can be realised as a result.⁸³

The technological expertise and practical experience gained during the rollout of the e-CNY offer China the opportunity to play a leading role in the future development of the infrastructure of a digital international payment system and to increase its autonomy in this area. In a quantum leap, so to speak, the RMB could gain international distribution and influence. The disruptive nature of this revolution in digital payments is fuelling ambitions in China that the country could go from being an out­sider in the global financial system to an insider, or even a world leader. The technology and infrastructure of inter­national payments could be China-centred in the future.⁸⁴

The e-CNY is a retail CBDC that was developed for China’s domestic payments. However, the design could easily be extended to wholesale processes and international transactions. The major hurdle for the acceptance of e‑CNY in cross-border money transfers is the lack of interoperability with payment systems abroad. The strategic goal of the PBoC and Chinese financial policy must therefore be to establish this interoperability with as many foreign payment sys­tems as possible and to enforce its own standards for multilateral solutions. The design of the infrastructure of international payment transactions is current­ly still completely open. From a Chinese perspective, initiatives for the development and promotion of an international payment system that is interoperable with the e-CNY must necessarily be broad and diverse. The motto seems to be “Let a thousand flowers bloom”. China’s e-CNY internationalisation projects include unilateral and multilateral initiatives, bi­lateral measures, disruptive innovations and the further development of existing payment systems.

Promoting the internationalisation of the renminbi?

There is widespread expectation in China that the e‑CNY will provide a new and effective momentum for the broader international use of the RMB, especial­ly as the escalation of the Sino-US rivalry has given political urgency and priority to the goal of RMB inter­nationalisation.⁹⁶

However, as already discussed, it is unclear whether, when and how an interoperable cross-border sys­tem for payment transactions will materialise. It is also likely that China’s e-CNY will be met with great scepticism abroad. Regardless of these reservations, however, the People’s Republic, with its technological expertise and political influence, could succeed in establishing the e-CNY as the payment means of choice in the inevitable digitalisation of international payments. The RMB would then gain status on a global level. For China itself, digital capital trans­actions with foreign countries would be easier to monitor, meaning that controls could be relaxed.

Higher percentage shares of the RMB in global payment transactions do not necessarily lead to a greater attractive­ness for other monetary functions.

However, its use as a means of payment is only one of several monetary functions that determine the appeal of an international currency. Higher percentage shares of the RMB in global payment transactions – possibly also in global foreign exchange trading – do not necessarily translate into a greater attractiveness for other monetary functions, particularly as a private investment vehicle or reserve currency. Even if the interoperability of digital payment transaction systems is possible with e-CNY, the willingness of investors to hold large quantities of RMB will remain low as long as China continues to maintain capital controls and market access barriers to its domestic capital market. Not only does the PRC lack an open, deep and well-developed capital market where RMB could be invested freely and indefinitely, the avail­able information on Chinese companies and debt instruments is not reliable. China’s politics and insti­tutions do not enjoy the trust of the global financial markets. There are doubts as to whether invested capi­tal can be withdrawn from China even in finan­cial crises. In view of the political and economic un­certainties in the People’s Republic, it is uncertain how stable the value of the RMB will be in the long term.⁹⁷

Ultimately, the e‑CNY is not a new currency, but a technology and an infrastructure. The e‑CNY gives Chinese central bank money a new, digital form. However, the issuance of e‑CNY is not accompanied by an expansion of the money supply, which could potentially spread outside of China’s borders. Con­ceptually, the e-CNY is 100 per cent backed sovereign money. It is therefore to be expected that, as long as China maintains capital controls, the RMB will con­tinue to play only an outsider role as a global credit and investment vehicle.

Instrument of foreign and security policy

China’s various efforts to achieve interoperability in cross-border digital payment transactions are proof that the e-CNY project has taken on a strong inter­national focus beyond its original objective of protect­ing national monetary sovereignty. For China, digital currency policy is not only monetary and currency policy, but also, and above all, trade and industrial policy, as well as foreign and security policy. China’s goal is to counteract its own disadvantages in the multilateral financial system, reduce its existing eco­nomic and political vulnerabilities, develop its own economically profitable industrial capacities, and, in the medium to long term, reshape the existing global structures in a way that they become compatible with China’s authoritarian one-party system.

Digital central bank money offers China the opportunity for a new disruptive start.

From a Chinese perspective, the current system of international payments is not only costly and ineffi­cient. It is also problematic in terms of foreign and security policy, as it gives America – its geostrategic rival – the power to exclude individuals, companies and countries from this international payment sys­tem. Individuals and companies from China, Hong Kong and Macao have already been the target of American financial sanctions on several occasions. Digital central bank money offers China the opportunity for a new disruptive start. An e-CNY that can be used in international business transactions would not only reduce vulnerability to Western financial sanctions. What’s more, a new, innovative system of international payments that is based on an interoperable CBDC would no longer be dollar-centred. The newly emerging structures could create new depen­dencies in the future – now vis-à-vis the PRC. Beijing would gain new power resources and capabilities with a prospective China-centred infrastructure for payment transactions, and it would give it access to payment data worldwide.⁹⁸ A functioning infrastructure for cross-border payments with CBDCs under Chinese leadership could substantially improve China’s geopolitical position in several respects:

• By participating in the new China-centred digital payment system, foreign companies and countries would become dependent on the new infrastructure, its reliability and the continual software up­dates that are required. China’s approach of expanding its own sphere of influence abroad by exporting technology and infrastructure is well known, not least from the discussions about Huawei’s telecommunications hardware and Chinese surveillance software. The willingness of countries that use these technologies to respond to Beijing’s wishes for cooperation in politics and business – and also to refrain from criticising their Chinese partner – would inevitably increase.⁹⁹

• As mentioned above, China’s security and financial authorities would gain a new lever for extraterritorial control and surveillance. They could track international transactions and use the information obtained to take action against capital flight, crime and criticism of the regime. If blockchain-based programmability is available, Chinese authorities could even block or reverse certain payments. The new digital infrastructure for international payments “made in China” would also give Chinese authorities and digital companies privileged access to payment data within the new system. The Chi­nese state could use this wealth of data – combined with other personal or company-related in­for­mation – for propaganda purposes or for coercive measures against foreign companies and states, for instance. For Chinese digital companies, the data could potentially be advantageous in international competition.¹⁰⁰

• Circumventing Western financial sanctions would be easier and cheaper in the future with a functioning digital payment system. Transfers could be made outside of Western clearing houses and bypass the SWIFT system (which is blocked in the event of sanctions). It would also no longer be possible for the initiators of the sanctions to immediately identify, let alone prove, a breach of Western sanctions. However, the Western side could continue to respond to a breach of sanctions by imposing secondary sanctions. In this case, how­ever, the secondary sanctions target would not be a Chinese company or commercial bank, but the state-owned PBoC itself. The Sino-American conflict would reach a new level of escalation. Given this kind of escalation risk, it is unlikely that the PRC would be willing to allow third countries to use the e-CNY in order to circumvent sanctions. China would probably want to reserve this option for itself.¹⁰¹

China’s potential gains in power described here are currently only hypothetical. It is uncertain whether – and, if so, when – interoperability in cross-border payment transactions with CBDCs will be realised. The technical and regulatory obstacles as well as the difficulties regarding sovereignty are enormous. The majority of countries would probably also refuse to accept an infrastructure in which China had complete data sovereignty and could carry out all programming itself. However, there are also huge economic and political incentives to make international payment transactions more cost-effective and efficient and to protect them against Western threats of sanctions. It is rather likely that human ingenuity will solve the remaining implementation problems.