China’s State-Sponsored Digital Currency: Impacts On Fintech/Third-Party Payment Platforms

Authored by Xingang Wang and Xin Chen.

The Reserve Bank of New Zealand (RBNZ) has been holding public consultations on the possibility of a central bank-issued digital currency (CBDC) since September 2021. Although it has yet to announce a decision, its CBDC probing process has already progressed beyond desktop research to investigations of feasible designs of a Kiwi digital currency that might support wider financial inclusion and wellbeing.

China on the other hand has already seen the domestic transaction volume of its e-yuan crossing the US$14 billion mark in 2022. This figure positions the digital RMB as the world’s most adopted CBDC. However, the long-term effects of the e-yuan on the existing financial infrustracture and the evolving digital finance remain a hot topic of public debates among the Chinese. Given China’s forefront position in CBDC development, the public deleberations may shed light on the roles and business prospects of third-party financial service providers in the development of an efficient and competitive CBDC ecosystem.

Since the concept of Bitcoin was proposed in 2008, there have been three major rounds of discussions on the topic of digital currency in China’s academic, policy, finance, and interested public circles. The first round focused on Bitcoin’s potential to grow into a new generation of legal tender, the second on Libra’s capability to become a “super-sovereign” currency for cross-border settlements, and the third on central bank-issued digital currencies (CBDCs).

These discussions inspired the People’s Bank of China (PBC) to begin digital yuan research in 2014, to establish the China Digital Currency Research Institute in 2016, to complete the development and system testing in 2019, to launch in 2020 the e-CNY (Chinese yuan), also commonly referred to as digital RMB or the Digital Currency/Electronic Payment (DCEP), and to continuously expand the pilot programme across China ever since.

In the meantime, the Chinese economy itself has witnessed a dramatic transition towards digitalisation. As recently as a decade ago, for example, China was a country highly dependent on cash transactions. Although the number of EFTPOS/debit cards reached 1.8 per capita in China in 2010, over 60% of its retail consumption was still completed by cash payment. Then came the rise of a vibrant fintech industry and the development of a flourishing e-commerce market, which have rapidly and significantly changed the state of affairs. According to the PBC’s figures, in the ten years from 2009 to 2018, the amount of cash in circulation in China increased 91%. At the same time, however, the monetary value of non-cash payments jumped up 427%.

Among the pivotal pioneers and enablers of China’s digital transaction revolution are third-party payment platforms that are predominantly represented by Alipay and WeChat Pay. To harness digital technologies and social networks, Chinese fintech giants have launched and promoted mobile payments, which are now intrinsic to Chinese consumers’ daily lives. Enabled by the immense popularity of smartphones, fintech platforms’ seamless digital transaction services have in fact already put China on the fast track to becoming a cashless society. In major cities like Beijing, even beggars in the street are found using laminated QR codes and mobile payment apps for handouts.

It is thus widely held in China that the brisk evolution of alternative methods of payment transactions, especially third-party platforms, has greatly promoted and laid the ground for the birth of the digital RMB. By comparison, the e-CNY wallet has been designed to furnish the public with an even more efficient transcation mechanism as it enables payments to carry settlement finality. Transactions using the e-CNY are also promised to be more convenient because they can be done without the internet. The “sovereign” digital cash is further anticipated to diminish credit risks in both domestic and cross-border settlements. Last, but not least, it carries zero payment service charges or fees.

Attractive features as such have sparked heated discussions within China on whether and how the e-CNY may impact third-party payment platforms. A particularly hot topics is whether the digital RMB can and will shake or even break the duopoly of Alipay and WeChat Pay, which together account for more than 90% of China’s third-party mobile payment market. Whether or not the e-CNY will ultimately become an alternative to third-party platforms, its potential short-term impact is generally anticipated to be limited.

A widely acknowledged reason stated by Chinese finance professionals, researchers and commentators is that, in addition to the payment business, third-party platforms also provide money market fund services. They can thus bring their users returns that the e-CNY cannot. Equally important is the fact that Alipay and WeChat are also social networking apps, which are already essential parts of the average Chinese’s daily life.

Furthermore, the digital RMB is still an evolving phenomenon of China’s e-commerce and hence needs the continuing support of third-party platforms for its promotion and application among Chinese consumers and businesses. Additionally, given their growing global presence, leading mobile payment platforms may easily and readily provide the digital RMB with e-wallet services in cross-border transactions. All this, in return, may inspire and enable fintech/third-party platforms to leverage the e-CNY’s demand for their assistance and service to reinvent themselves to stay relevant and competitive in China’s digital RMB-reshaped financial landscape.

Dr Xingang Wang, Professional Teaching Fellow, Department of Economics, Business School, University of Auckland; xingang.wang@auckland.ac.nz

Dr Xin Chen, Research Fellow, New Zealand Asia Institute, Business School, University of Auckland; x.chen@auckland.ac.nz

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