A Digital Yuan Should Be Welcomed by the US
A Digital Yuan Should Be Welcomed by the US
Once again, people are talking about a digital currency. This time, it’s the potential competitive threat from a digital yuan. But there’s no threat here at all — if China creates a digital currency, it’ll be little different from the payment methods they already use. And if the yuan partially replaces the dollar as the global reserve currency, that’s a good thing, not a bad thing.
Since about a year ago, China’s government has been publicly discussing the possibility of a digital yuan. When people talk about digital currencies, they think about Bitcoin and other cryptocurrencies, but a digital yuan — or any digital government-backed currency — would almost certainly not be like that. It would simply be an app on people’s phones that would hold a certain amount of yuan that you could send to other people. In other words, it’s more like Venmo than Bitcoin. This makes sense, because Bitcoin uses an extremely laborious and expensive process to verify transactions, but transactions with the digital yuan app could just be verified by China’s central bank much more cheaply.
So what does it matter if China’s government makes an app that allows people to pay each other money? After all, most yuan transactions are already digital, so the practical difference for the average Chinese person would be very low. China’s existing fintech companies might be crushed by the competition, but for China’s rulers that might be a feature rather than a bug — they’ve already taken steps to curb the power of Ant Group Co., which handles most of the country's digital transactions. And a digital yuan would definitely give the government greater control over its citizens’ finances, since it could trace all transactions and presumably also freeze citizens’ accounts if it wanted. All of this would be in keeping with the Chinese state’s recent moves toward greater control of the economy and daily life.
But should the US be concerned? There are reports that the Biden administration is worried that a digital yuan could compete with the dollar and potentially supplant the US currency at the center of the global financial system. But that’s just not a thing worth worrying about.
Currently, the dollar is the currency most commonly used in transactions in the global banking network, with the Euro being its only real competition. Despite China’s economy being about as large as that of the US or Europe, very few international transactions are done in yuan.
The fact that dollars are so commonly used in transactions creates a natural demand for dollars all over the world, since institutions need to keep some dollars on hand to make payments. That pushes up the value of the dollar, which in turn makes US-made goods more expensive on world markets. A “strong dollar” may make for a good slogan, but if you’re an American company looking to sell products overseas, a strong dollar actually makes you weaker.
Making the yuan an important part of the global financial system might therefore raise prices for American consumers (because imports would cost more), but it would raise employment and wages at businesses that export. Given the concerns over America’s deteriorating competitiveness, that’s a tradeoff the Biden administration might be happy to make.
Another advantage of a more internationalized yuan would be global financial stability. Currently, with the dollar as the world’s main reserve currency, the world financial system is extremely vulnerable to any unrest and instability in the US — for example, a more effective version of the Jan. 6 insurrection. Adding the yuan to the world’s reserve basket would diversify part of this single-country risk.
In other words, a more internationalized Chinese currency is in the interest of both the US and the world. Unfortunately, this might be why China never goes very far with the whole digital yuan project. The country is still deeply committed to its mercantilist strategy of keeping the yuan cheap in order to boost international demand for Chinese products, thus cementing China’s status as the world’s manufacturing center. A digital yuan, if available outside China’s borders, could compromise that strategy.
An internationalized yuan could also allow destabilizing hot-money inflows as people around the world downloaded the yuan app in order to buy up Chinese real estate and other assets. International investors are notoriously fickle; this kind of frenzy can quickly reverse, causing a damaging price crash.
Finally, an internationalized digital yuan could allow Chinese citizens and companies to move money out of the country very quickly in the event of a crisis. This happened when the country’s stock market crashed in 2015; only by tightening capital controls was China able to stanch the outflow of money. A digital yuan would make such interventions much harder.
So China seems unlikely to create a digital yuan that reaches beyond its national borders. It would endanger too many pieces of the state-directed growth model the country has successfully used heretofore. And if an international digital yuan eventually does emerge, so much the better.