Updated 8:47 AM EST, Fri, Mar 05, 2021

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What to Watch for with China's Digital Currency

What to Watch for with China’s Digital Currency

(Photo : Pixabay) What to Watch for with China’s Digital Currency

We have been hearing about the potential rollout of a national digital currency in China for some time now. And while said rollout has at times been put on old, it appears as if it may now be imminent. The New York Times wrote just this month that China is charging ahead with what is now being called the electronic Chinese yuan (or eCNY). The currency is already being tested in the major metro areas of Shenzhen, Shanghai, and Beijing, and it is essentially a straight-up digital version of the yuan. With eCNY, users can make transactions with ordinary Chinese currency in electronic form, without having to go through a third-party processor like PayPal.

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Testing the digital currency in three big cities is a significant leap forward for China, and indicates that the intent is still to develop a widespread, modern replacement for physical currency. But how should we assess the project's success or impact?

First and foremost, we should wait for an actual national rollout. Data and feedback from the cities mentioned above will certainly tell us something about how the eCNY is being received, and may set the tone for the national response. But any sweeping assessment or final ruling on this venture's success (or failure) that is made before the rollout is more widespread will by nature be incomplete.

When the digital currency is more widely released, it will be wise to keep an eye on whether or not it seems to have any effect on the international standing of the yuan. To be quite clear, eCNY is not a separate currency from the yuan so much as an alternate form of it. But the extent to which it is embraced and valued may still affect the overall price of the yuan. To assess this, it will be best to keep an eye on forex market heat maps, rather than on pairings of the yuan with any individual counterparts. These visualization tools are demonstrated by FXCM to have the ability to show assets' performance within their broader markets. Should heat maps show the yuan making notable gains next to other currencies across forex, it may be an indication that an eCNY rollout is generating positive momentum.

That would indicate both Chinese and international interest in the project. But another thing to monitor in assessing the success or failure of China's digital currency is the performance of cryptocurrencies in the country. As alluded to even a few years ago in the piece 'China Warns Investors Over Risks in Overseas Virtual Currency Trading', the Chinese government has at times been fairly rigid in its stance toward cryptocurrencies. This, plus the introduction of a national digital payment method, should in theory reduce Chinese interest in crypto trading. And this introduces a potential indicator. If crypto trading declines in China upon the wider rollout of eCNY, it may be a sign that the Chinese public is ready to embrace the electronic yuan; if we don't see such an effect, or if crypto trading increases, it could be an early tell that the digital yuan is not being embraced.

Maybe the clearest indicator of how the eCNY project is going will be news about practical uses for it. The intent is for this currency to work exactly like the yuan, but in digital form. That means that unlike bitcoin and other cryptos, it is meant to be useful anywhere that transactions occur. Naturally though, this will depend on point-of-sale evolution as well. If Chinese businesses are slow to embrace digital payments, either in person or online, it could stall the transition to eCNY.

Finally, it will also be a good idea to keep a close eye on the U.S. dollar. While we maintain that it will be most useful to observe the yuan's performance relative to the broader forex market, the relationship with the dollar also carries special significance. Only last year, The Balance wrote a piece about China's "plan to replace the U.S. dollar" as the global reserve currency, and while this isn't something that can happen overnight, it is something that a successful digital yuan would only help with. If we see any sort of prolonged decline of the dollar relative to the yuan, it will be a strong indication that eCNY is having the desired effect.

Only time will tell how all of this turns out, but it's a very bold initiative from one of the world's most impactful economies. The ongoing rollout of the digital yuan will be fascinating to observe.

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