China's digital yuan is little used - a preliminary analysis
Central bank official turned Tsinghua professor says the supposed advantages of China's statutory digital currency haven't materialized and are eclipsed by Big Tech's payment systems.
China is the forerunner of the study of statutory digital currency. It has piloted the use of its digital yuan, also called DCEP (digital currency, electronic payment) in China and CBDC (central bank digital currency) globally, in some domestic regions and scenarios.
The rest of the world is watching its experiment closely. But recently, a central bank official turned Tsinghua University professor said in a public form that central bank digital currency is little used and faces significant structural obstacles.
Xie Ping is currently a Professor at 清华大学五道口学院 Tsinghua University PBC [People’s Bank of China] School of Finance and an Advisor at the 清华经管数字金融资产研究中心 Research Center for Digital Financial Assets at the School of Economics and Management, Tsinghua University.
Previously, he served as former deputy manager of China Investment Corp., the Chinese sovereign fund, and head of research at the People's Bank of China (PBOC), China’s central bank.
The following is a translation of a WeChat blog of the Research Center for Digital Financial Assets at the School of Economics and Management, Tsinghua University, recording Xie’s recent remarks on December 28, 2022.
Xie Ping: A preliminary analysis of the low usage of digital yuan
The Second Conference on the Frontiers of Digital Finance was successfully held online on December 28-29, 2022. It was organized by the Center for Digital Financial Assets at the School of Economics and Management, Tsinghua University, and Professor Luo Mei, the Center’s director, served as the moderator.
In a panel discussion on “Blockchain and Digital Currency” on the morning of December 28th, Xie Ping, Professor of Tsinghua University PBC School of Finance, former deputy manager of China Investment Corp., and Advisor at the Research Center for Digital Financial Assets at the School of Economics and Management, Tsinghua University, delivered a speech entitled “A Preliminary Analysis of the Low Usage of Digital Yuan.” This article is compiled based on the content of his speech.
Professor Xie Ping said that the cumulative number of transactions in the pilot areas [for digital yuan] of 15 provinces and municipalities nationwide was 360 million. The amount involved was 100.4 billion yuan, according to the data published by the Digital Currency Research Institute of the People’s Bank of China as of August 31, 2022.
PBOC’s payment system report for the second quarter of 2022 shows that about 1 billion people in China currently use third-party payment platforms, and the volume of network payment business (third-party payment platforms) by non-bank payment institutions reached more than 200 billion transactions per day and 1.31 trillion yuan per day.
Currently, there are 9.3 billion bank cards in China, and their daily transaction volume is about 500 billion yuan.
The comparison shows very few people use the digital yuan in spending, and the adoption is very inactive.
Professor Xie Ping analyzed the unpopularity of the digital yuan from both the consumer side and the features of the digital currency. From the consumers’ side, the existing cash, bank cards, and third-party payment platforms have formed a three-dimensional payment market pattern, which is more than enough for people’s daily payment needs in spending, and it is challenging to change payment habits overnight. Currently, using the digital yuan in different payment scenarios requires people to open various digital wallets and merchant platforms, a disadvantage compared to existing third-party platforms. In this sense, the ecosystem of the digital yuan has not been built. That contributes to an unawareness of the digital yuan and a lack of motivation.
The high cost of promoting the digital yuan is a practical problem that has to be addressed. Issuing physical cash and the digital yuan are two completely different things. To issue physical cash, there needs to be a printing plant with fixed machinery and equipment. The issuance of digital currency is entirely different. The issuance and management process of the central bank’s digital yuan is similar to that of technology companies' products, which requires constant maintenance and operation in the background, innovation, and adaptation to various scenarios - all very costly.
In addition, the increase in digital currency’s usage will have to rely not only on the offline promotion of the branches of the central bank at all levels but also on the technical transformation of scenarios where digital money is used. Considering the enormous costs paid by third-party payment platforms in the early days of offline promotion of their apps, the central bank, as a non-profit organization, has certain limitations in human and financial resources for offline promotion. If the digital currency’s usage does not reach a notable scale in the long term, the inability to form economies of scale will cause serious problems.
At the same time, incentives from banks are not enough to stimulate usage. Currently, digital currency does not bring either synergy to banks or commercial benefits, which provides the banks little incentives, not to mention the digital currency’s competitive relationship with third-party payment platforms.
We initially thought that digital currency has three advantages: it does not charge fees, it can operate offline, and it does not require electricity. But in practice, it seems that these three advantages, not depending on electricity or the Internet, are based on events that rarely happen. Thus its advantages are difficult to manifest, and the advantage of zero cost now seems to be eclipsed by the competitive efficiency of third-party payment platforms.
Synergies from the collection, application, and profit of transaction data are significant in third-party payment companies and their related online platforms, like those between Alipay, Taobao, and Ele.me [a platform for takeaway food], building economies of scale and yielding surplus returns. Such financial incentive prompts third-party payment companies to increase investment in technology and continuously create technological improvement, thus expanding their application scenarios and enhancing their services. As the central bank cannot utilize business incentives like Internet companies, the non-fee advantage is negligible.
In addition to spending, third-party payment platforms can also embed other financial functions, like buying wealth management products, funds, and insurance, as well as taking consumer loans, etc. That provides a lot of convenience for people's daily life, but digital currency has little to offer.
On the whole, paper money is exclusively issued by the central bank, and there is no competition. 9.3 billion bank cards are in circulation, as we have just mentioned, and everyone has four or five cards as a result of the competition among banks. Bank cards mutually benefit banks’ profits, so banks are very active. The competition between the digital yuan and third-party payments is another story, especially since our country has designated the digital yuan for consumer spending only, resulting in the above-mentioned situation, which requires us to conduct an in-depth analysis. We still face a long way to go in using the digital yuan.
To improve the current situation and realize a virtuous cycle of the digital yuan’s application as soon as possible, Professor Xie Ping suggests that first, expanding where the digital yuan can be used may be a solution, considering the current use of the digital yuan is limited to M0 as a cash substitute and only for consumer spending.
Second, changes need to be made to address the current unfavorable outcome, such as allowing individuals to use E-CNY to purchase financial products. In addition, expand the pilot and promotion as soon as possible so that the digital yuan can be integrated into more payment scenarios, achieve nationwide usage regardless of payment scenarios as soon as possible, and achieve economies of scale.
Third, cooperation with third-party payment platforms should be strengthened to form a synergy. 92 merchant platforms have been integrated into the latest digital yuan app as of December 2022, and the only supported third-party payment platform in the app’s "Payment Platform" section is Alipay. Taobao has opened its digital yuan payment portal to most users. Compared with JD.com and Meituan [two wildly popular Chinese apps for consumer spending], which require extra steps, using the digital yuan in Taobao [part of Alibaba] is easier.
Fourth, we should accelerate the design of the digital yuan’s wallet design and the improvement of the ecosystem for the digital yuan’s smart contracts Smart contracts can effectively prevent the misappropriation of funds, achieve transparent management, align with existing business models, protect the interests of all parties, and form an ecosystem for the digital yuan as soon as possible.
Fifth, the central bank should invest more resources, improve the system's design, including budget and talent, and improve the incentive mechanism to promote the use of the digital yuan by banks, merchants, and consumers. (Enditem)
Pekingnology, another China newsletter now hosted by the non-governmental Center for China and Globalization (CCG), covered Chinese domestic discussions about the digital yuan. Take a look if you are interested.