Will Hong Kong Trial Be Another Blow to China's Dependence on the Dollar?
In February 2022, Hong Kong became the first city outside the mainland to use the digital yuan, or e-CNY. A pilot program, it will test cross-border retail use of China's central bank digital currency (CBDC). And those in the know say small retail businesses and restaurants will be among the first to benefit.
At a regular monthly financial affairs panel meeting of the Legislative Council prior to the program's launch, Eddie Yue, chief executive of the Hong Kong Monetary Authority (HKMA), said the test should strengthen the city’s role as an offshore yuan trading center.
Linked to the Faster Payment System (FPS)
HKMA staff had already been testing the digital currency for almost a year by moving Hong Kong dollars to e-CHY wallets on the Faster Payment System (FPS), which was introduced by the HKMA in 2018. This link to the FPS makes the Hong Kong trial unique because it allows for instant cross-bank payments in the Hong Kong dollar (HKD) and the Chinese yuan with only the mobile phone number or email address of recipients.
Director-general of the People's Bank of China's digital currency institute Mu Changchun confirmed that this interlinking of the e-CNY with the FPS was intended to improve efficiency without changing people’s payments habits. In 2022 the FPS opened on 9.6 million registrations and recorded an average of 670,000 daily transactions in 2021—up 90 percent on 2020’s transaction volumes. Considering Hong Kong’s population is at just 7.4 million, that’s a good uptake in any terms and indicates the maturity of the FPS.
During the trial, Hong Kong residents in the Greater Bay Area (GBA) will be able to use e-CNY. At the same time, individuals from the mainland will be selected to use it at some Hong Kong businesses, thereby eliminating the need for two e-wallets.
The GBA connects Hong Kong with 11 cities in Southern China, including Shenzhen, Guangzhou, and Macau. Its GDP is expected to reach US$4.6 trillion by 2030 (comparable to the economy of the San Francisco Bay Area). If all goes well, mainland visitors will be able to make payments to Hong Kong retailers with e-CNY, while business owners could receive the payments directly in HKD. It’ll be a significant benefit to small and medium-sized businesses because they won’t have to change much to accept and convert e-CNY payments. At the same time, e-CNY could help the Hong Kong economy recover by enabling smoother commerce with the mainland, especially the GBA.
E-CNY Users Are Increasing Dramatically
In December 2021 e-CNY users reportedly doubled, from 140 million a few months previously to 261 million. Fewer and fewer people on the mainland are using cash, and Hong Kong will need to catch up if it wants to attract back its mainland tourists when COVID restrictions are dropped again, say experts.
China is leading the race among major economies to develop a centralized digital currency. Its central bank began working on the digital yuan in 2014, and in recent years it has piloted it in major cities such as Beijing, Shanghai, and Shenzhen. The digital currency was launched for use by foreign athletes and visitors at the Beijing Winter Olympics, and other countries' monetary authorities are watching developments keenly. The digital yuan was available for payments in addition to cash and Visa cards, reportedly.
According to the People’s Bank of China (PBOC), 20 percent of China’s population are using the e-CNY mobile app. Since its initial pilot test in 2019, transactions have totaled $9.7 billion, mostly through retail transactions. The PBOC has pushed for a digital currency for improved monetary control and money supply management. It also lowers the cost of issuing currency.
The rapid growth of fintech platforms in China—thanks to government support, private investors, and significant domestic demand—has meant digital transactions have already essentially replaced cash. Although some experts view the central digital currency as a threat to the dominance of private platforms, some of the most prominent players, like Alipay and WeChat Pay, support the use of the digital yuan.
Privacy is a lingering concern for centralized digital currencies, as individual transactions are recorded and easily traceable—one of the main reasons CBDC development is stalling in the West.
Will the Digital Yuan Undermine the Dollar?
The dollar accounts for 88 percent of all international settlements, compared to the yuan's 4 percent as of 2019. The Chinese government has been open about its desire to decrease its dependency on the dollar. The e-CNY will likely replace the dollar in trade with China and change the dynamics of Asian trade.