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To enhance the effectiveness of monetary policy tools, a Chinese foreign currency regulatory representative is proposing the utilization of China's Central Bank-Backed Digital Currency's (CBDC) "programmable attributes." While the widespread use of CBDCs remains in its early stages, China and several other nations are actively engaged in their development.
China's Central Bank-Backed Digital Currency (CBDC) primarily serves as M0 money, equivalent to physical cash. However, there's a potential transformation on the horizon that could extend CBDCs into the realm of M2 currency, encompassing deposits and savings. This expansion hinges on the inherent adaptability and programmability of CBDCs, allowing for flexible criteria to be established and opening various avenues for exploration.
The 'programmable features' in CBDCs are underpinned by their inherent adaptability. This adaptability might involve setting an expiration date for money or stipulating its use in specific ways. Furthermore, it might encompass the potential for central banks to adjust interest rates within the CBDC system. The vision outlined by SAFE Deputy Administrator Lu Lei underscores how central banks can harness CBDCs' malleability to improve economic stability through macroeconomic management.
Chinese Banks Collaborate with BIS to Pave the Way for International CBDCs
The potential of CBDCs extends beyond national borders, promising advancements in international financial operations. Lu Lei contends that CBDCs could significantly enhance international money transfers' security, efficiency, and transparency. Collaborative efforts between China's state-owned banks and the Bank for International Settlements (BIS) are underway, focusing on testing international CBDC transactions.
These pilot programs seek to assess the practical viability of CBDCs in facilitating cross-border monetary exchanges. Remarkably, the total value of e-CNY transactions in China had exceeded $1.8 trillion by the end of June. However, it still represents only a negligible 0.16 percent of the M0 currency in circulation in the country.
Shenzhen Unveils Digital Renminbi Industrial Park: A Pillar for e-CNY Growth
Shenzhen, Guangdong province, celebrated the inauguration of China's first digital Renminbi (RMB) industrial park in the city's Luohu district. This milestone signals a pivotal step in advancing China's digital currency, e-CNY. The first cohort of nine financial enterprises, including Lakala Payment, has relocated to the park, aligning with the district administration's ten-point plan to foster the local digital RMB ecosystem.
Over the next three years, the government is committing 100 million yuan ($13.7 million) to bolster the digital RMB ecosystem in Luohu, with a particular emphasis on digital economy-related fields such as computers, algorithms, and data. These initiatives aim to streamline payment solutions across various sectors, promote blockchain-based smart contracts, integrate hardware wallets with smart devices, and facilitate the adoption and operation of e-CNY.
Huang Tuo, chairman of the Luohu financial services department, emphasizes the historical significance of establishing China's first digital RMB industrial park. Luohu aspires to shape a new development model for the digital economy cluster and enhance Shenzhen's digital economy's high-quality development by attracting digital RMB industrial chain enterprises, fintech entities, and major platform players.
Incentives to Boost e-CNY Industry
The Luohu Park offers substantial settlement incentives of up to 20 million yuan to entice commercial bank branches involved in e-CNY and industry-specific players. Furthermore, startups operating in the e-CNY sector benefit from investment-based settlement incentives of up to 50 million yuan. Businesses excelling in revenue can access incentives of up to 500,000 yuan.
Rent subsidies for up to three years are available to businesses relocating to the industrial park, with the option to apply for low-interest loans and establish digital RMB experience centers. The combination of these incentives aims to stimulate the growth of the digital RMB industry and foster a dynamic ecosystem within the park.
China's digital RMB journey began in 2019 with a pilot program, which has since expanded to 26 communities. As of December last year, 5.6 million registered businesses in China accepted e-CNY. By the end of June 2023, e-CNY transactions had reached 950 million, with a cumulative value of 1.8 trillion yuan. The former governor of the People's Bank of China, Yi Gang, reported these figures, highlighting the growing adoption and usage of e-CNY.
Many applications, including using e-CNY with overseas credit cards and payments without power, are under evaluation or already implemented, showcasing the versatility and potential of China's digital currency.
In conclusion, China is pushing the boundaries of its digital currency capabilities, emphasizing the programmable features of its CBDC and creating dedicated hubs like the digital RMB industrial park in Shenzhen to foster innovation and growth in digital currencies. These initiatives have the potential to revolutionize domestic monetary policies and enhance the efficiency of international financial transactions. The global landscape of digital currencies is evolving, and China is taking center stage in shaping its future.