[The Editors' Verdict] China Begins Internationalization of the Digital Yuan

Jung Yoo-shin, Leading China's Digital Yuan Experiment
Shenzhen and Shanghai Showcase Different Approaches
Expanding Financial Inclusion and Protecting Local Banks
Greater Bay Area to Become the First International Testbed
Challenges Remain for Globalization of the Digital Yuan

Since the second quarter of last year, China's digital yuan pilot experiment, which has attracted global attention, is rapidly starting from the first day of the new year. The regions involved are Shenzhen and Shanghai, key cities in Guangdong Province, China, and the market is focusing on the differences in the experiments between these two locations compared to last year.

In Shenzhen, a total of 20 million yuan (approximately 3.4 billion KRW) worth of digital yuan was distributed as hongbao (New Year's money) to 100,000 citizens (about 34,000 KRW per person). The method involved Shenzhen city accepting applications from January 1 and selecting 'hongbao citizens' by lottery, allowing them to use the digital New Year's money at about 10,000 stores until January 7. Besides the scale (twice that of Suzhou), the distinctive feature is that unlike Suzhou, where digital yuan usage was mainly online, Shenzhen only allowed usage at physical stores, excluding online transactions.

Also, at the Shanghai Jiaotong University Affiliated Hospital in Shanghai's Changning District, a card-type digital yuan is being used. This is a dedicated card with an IC chip. Surprisingly, a small screen on the upper right corner of the card displays the amount spent, balance, and number of payments. This is a completely different method from the previous online and smartphone app usage.

The market evaluates that through the digital yuan experiments in Shenzhen and Shanghai, the Chinese government is aiming for two main effects besides accumulating various experimental results and data. First, from the financial consumer perspective, it aims for financial inclusion effects for those who prefer 'going to stores rather than online' or are not familiar with smartphones. Considering that China's elderly population (aged 60 and above) accounts for 18%, and rural population about 46%, the population for financial inclusion could be two to three times that of South Korea. Since the Chinese government aims for digital yuan usable by all citizens nationwide, it cannot focus solely on online and smartphone usage. Second, it is believed to promote the digitalization of existing financial institutions such as banks while also protecting their business and revenue activities. For example, with the recent surge in defaults by Chinese companies, there are opinions that red flags have been raised over non-performing loans, especially in local banks. Therefore, it is judged that it would be problematic if IT giants like Alibaba and Tencent further encroach on the financial market.

Allowing the use of digital yuan through all means such as smartphones, cards, online, and physical stores will also help expand the digital yuan beyond China.

The Chinese government has been initiating the internationalization of the digital yuan since the second half of last year. The first experimental target region is the Greater Bay Area (Dawanqu), which can be considered the largest single economic zone in Asia, including Hong Kong, Macau, and nine cities in Guangdong Province. Once the experiment in the Dawanqu region begins soon, it will be the first digital yuan experiment in a region where two different currencies, the yuan and the Hong Kong dollar, circulate, and it is expected to serve as a starting point for the internationalization of the digital yuan.

However, in the full-scale internationalization process of the digital yuan, burdens such as foreigners having to open accounts with the People's Bank of China, the central bank, and potential privacy issues may arise. Additionally, the internationalization of the digital yuan could be an obstacle as it may increase concerns about disruption to financial systems and policies, as well as money laundering risks in advanced countries like the United States. Recently, with the U.S. Office of the Comptroller of the Currency (OCC) positively reviewing stablecoin issuance and the possibility of Libra issuance being raised again, the issuance of China's digital yuan is expected to accelerate.

Jung Yoo-shin, Dean of the Graduate School of Technology Management at Sogang University and Chairman of the China Capital Market Research Association