China’s plan to globalize its digital currency may have found a possible starting point: the wealth management industry in Hong Kong.
Last month, the People’s Bank of China released detailed instructions on Wealth Management Connect, a program that will allow qualified individual investors in the southeast of the continent to invest a total of 150 billion yuan ($ 23 billion) in abroad via banks located near Hong Kong. and Macao. Residents of the two special administrative regions can invest up to the same amount in the other direction.
While China and Hong Kong have put in place similar pipes for two-way capital flows to stocks and bonds, this new arrangement is different: it only applies to investors and intermediaries in the region known as the Great Bay, which includes Shenzhen and eight other cities. in Guangdong province in addition to Hong Kong and Macao. With a population of 70 million and a combined gross domestic product of over $ 1.6 trillion, the homogeneous economic zone will be among the largest in the world.
Encouraging e-CNY for asset purchases in this wealthy region could be a perfect testing ground. What will it take for wealthy investors to view Chinese taxpayer-backed digital tokens as a safe store of value? Will the new currency have to pay interest? How? Without dismantling broader capital controls and without risking financial stability from uncontrolled inflows or outflows, Beijing can find the answers.
A successful pilot will help build global investor confidence in e-CNY and may even provide a model for other electronic currencies such as FedCoin, BritCoin or digital euro.
The biggest clue that China is considering conducting such a trial recently came from Xing Yujing, branch manager of the PBOC in Shenzhen. In an interview with Liaowang Magazine, Xing offered to conduct a test to monitor cross-border financial flows between Shenzhen and Hong Kong, using the digital yuan as a medium.
The logic of Shenzhen’s twinning with Hong Kong goes beyond their geographic proximity and historical ties. Shenzhen’s economy is run by the private sector. Its cross-border flows, which are mostly with Hong Kong anyway, represent 7% of China’s total. Any speculative spillover can be easily contained. that of Shenzhen special economic zone status, which propelled its rise as a global manufacturing power, can also be more easily changed than the laws of the continent to include a unique rulebook: A bank authorized to do something in Hong Kong can do the same in Shenzhen, and vice versa.
Xing did not explicitly mention Wealth Management Connect as the “financial innovation highway” that she described in her interview. But using e-CNY as a supporting currency for a pilot project that is not limited to specific products but encompasses an entire platform makes wealth management a prime candidate.
So far, e-CNY trials have focused on its role in facilitating day-to-day transactions where Alipay and WeChat Pay dominate. Wary of the hold of the tech titans over Chinese consumer behavior, the state wants to reassert control. Beijing can use the coercive power of laws and regulations to ensure the success of money as a means of payment.
But money must also function as a unit of account and a store of value. Challenging the dollar in commercial invoicing will not be easy. The Chinese currency’s market share in global payments is less than 2%, compared to 40% for the dollar. However, it should be possible to encourage foreigners to keep more of their wealth in yuan.
Beijing’s previous attempt to establish the yuan as a store of value saw Hong Kong’s currency-denominated bank deposits increase nearly 10-fold in five years to nearly 1,000 billion yuan in July 2015. both coming years. The yuan internationalization project has stalled.
Now, however, the confidence has returned.
China’s foreign exchange reserves are at a highest in five years, and the yuan ended last month near its strongest since 2018.
Allowing the rich to withdraw capital can ease the pressure on currency appreciation. A greater role for market forces will persuade global investors that their returns will not be affected by a repeat of 2015-style government interference. The narrowing of the volatility gap between the controlled onshore yuan and its the more freely traded offshore version shows that such confidence is starting to take hold.
The digital yuan, which won’t be ready at least before the Beijing 2022 Olympics, may have to join the Wealth Connect train later. It is just as well. Currently, e-CNY does not support smart contracts. Later versions can be integrated with self-executing software code. Securities settlements and automated interest payments are expected to help reduce transaction costs for investors.
Beijing’s desire to challenge the hegemony of the dollar is real. Using the rich to freewheel Hong Kong, the open economy with the digital yuan may be its best way to get closer to that distant goal.
This column does not necessarily reflect the opinion of the Editorial Board or of Bloomberg LP and its owners.
To contact the editor responsible for this story:
Patrick McDowell at [email protected]