G2 Digital Currency Different Calculations... Hurrying China VS Observing US
US Downgrades China's Digital Yuan as 'Non-Democratic Currency'
[Asia Economy Beijing=Special Correspondent Cho Young-shin, New York=Special Correspondent Baek Jong-min] # Yi Gang, Governor of the People's Bank of China (China's central bank), stated, "Among the 28 cities experimenting with digital currency, only four cities including Shenzhen have processed about 2 billion yuan in payments so far. The digital economy is an important driver of global economic growth. Research and application of digital currency will help the rapid development of China's digital economy."
# Jerome Powell, Chairman of the U.S. Federal Reserve (Fed), said, "I am not worried about other countries (China) having digital currency quickly. Doing it properly is more important than doing it quickly. The currency (method) used in China will not work here (in the U.S.)."
This clearly shows the contrasting views of the heads of financial authorities of the 'G2 (two major countries)' regarding Central Bank Digital Currency (CBDC). China is rushing to introduce digital currency, while the U.S. appears to be taking a wait-and-see approach. China is the most proactive country in adopting digital currency. Having started research on digital currency in 2014, China began trials last year. Although not an official stance of the Chinese authorities, there is speculation that the '2022 Beijing Winter Olympics' could be the final testing ground for digital currency.
◆ China on the verge of digital currency adoption
Shanghai Municipality and Suzhou City in Jiangsu Province will begin cross-transaction testing of the digital yuan issued by the People's Bank of China in line with the '5.5 Shopping Festival' starting on the 5th. This is the first time Chinese financial authorities have linked multiple cities for digital yuan trials. China conducted the first public digital yuan trial in Shenzhen, Guangdong Province in October last year, and the second public trial in Suzhou in December. Earlier this year, Beijing distributed 200 digital yuan (approximately 35,000 KRW) each to 50,000 people through a lottery. These 50,000 people used 200 digital yuan both online and offline. Some companies even started paying salaries in digital currency. Chinese e-commerce company JD.COM paid its employees' salaries in digital yuan last month. The company also paid partner companies in digital yuan upon request.
◆ The two faces of digital currency: good and bad
China is already a 'cashless' society. When buying goods, paying taxi fares, or settling restaurant bills, cash payments confuse cashiers. Sometimes they even get annoyed due to lack of change. Online transactions are a given. Most transactions are conducted through Alipay (Zhifubao) or WeChat Pay (Weixin Zhifu), which are linked to personal bank accounts. Given this situation, there is no real need to print cash. China could adopt digital currency tomorrow without causing confusion or disruption. Apart from 'paper money' and 'coins' disappearing into history, nothing else would change.
The biggest advantage of digital currency is that there is no need to bear the cost of printing money. As of October last year, the base money (M0) circulating in China amounted to 8 trillion yuan (approximately 1,380.4 trillion KRW). China's base money has been increasing annually, which entails costs for currency issuance, management, and circulation. Digital currency eliminates these costs. Counterfeit currency cannot exist. The anonymity associated with existing currency also disappears. Therefore, underground economies such as illegal funds are completely blocked. Tax resistance is also impossible.
However, since the currency is digital, authorities can scrutinize every individual's records in detail. Privacy disappears.
◆ The start of the U.S.-China currency hegemony war
The Chinese yuan is a currency unbefitting the G2 status. The yuan's share in international settlements is about 2%. In contrast, the U.S. dollar accounts for 39%, the euro 37%, and the yen about 3%. Considering that China accounts for nearly 20% of the global economy, this is quite poor. The Chinese leadership has been trying for over a decade to increase the yuan's share in international settlements but has not achieved significant results.
Last year, China's Gross Domestic Product (GDP) is estimated to have exceeded 70% of the U.S.'s GDP. Some forecasts even suggest that China could surpass the U.S. in total GDP as early as 2028, reflecting China's growing share in the global economy. However, the yuan has not received commensurate recognition. There are voices suggesting that China is rushing to introduce digital currency to elevate the yuan's status. It is suspected that China intends to increase the share of digital yuan payments among countries involved in the Belt and Road Initiative (land and maritime Silk Road) and use this momentum to challenge the dollar as the global reserve currency.
Li Bo, Deputy Governor of the People's Bank of China, downplayed this at last month's Boao Forum, saying, "The introduction of digital currency is not to replace the dollar but to promote international trade and investment through market choice."
◆ U.S. drives a wedge to render China's digital currency useless
Chairman Powell said at a press conference after the Federal Open Market Committee (FOMC) regular meeting on the 28th of last month (local time), "I am not worried about other countries (China) having digital currency quickly. Doing it properly is more important than doing it quickly." He added, "The currency (method) used in China will not work here (in the U.S.)." This can be interpreted as a warning not to even dream of expanding the yuan's share in international settlements, let alone becoming a global reserve currency.
Powell also disparaged the digital yuan as an 'undemocratic currency.' He assumed that the digital yuan would only be used within China and criticized, "China is rushing to introduce the digital yuan to monitor the real-time flow of money used by Chinese citizens." Powell also expressed that there is no need to rush the transition to a digital dollar. He said, "It takes time to understand the role of digital currency," and added, "We also need to verify whether countries using the dollar as a global reserve currency can use digital currency technology."
The Fed is currently conducting joint research on legal digital currency with the Massachusetts Institute of Technology (MIT). The Fed estimates that this research will take 2 to 3 years. Separately from the research, the Fed has set the establishment of legal grounds by Congress as a prerequisite for introducing a digital dollar.
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