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Victor Shih

The creation of a digital currency does not mean China can create a reserve currency for the international markets, says financial expert Victor Shih in Quartz. Domestically, it could mean the digital currency could try to catch back the financial room now occupied by commercial players like Alibaba’s Alipay and Tencent’s WeChat, he adds.

Quartz:

What investors are looking for in a reserve currency isn’t the technology—it’s a currency that’s stable, underpinned by a strong economy, freely convertible, and able to be used widely.

Victor Shih, an expert on China’s political economy and a professor at University of California San Diego, explained that merely introducing a digital currency “doesn’t solve the problem that some people holding renminbi offshore will want to sell that renminbi and exchange it for the dollar,” which is widely considered to be a safer asset. Here the gap is even larger: Nearly two-thirds of the world’s currency reserves are held in US dollars, compared with 2% in renminbi, the currency’s official name.

Suppose Iran sold China a large amount of oil, and accepted the digital yuan as payment. That would help with Beijing’s goal of pursuing more widespread use of the yuan in international transactions. But Tehran would probably want to use at least a quarter of those earnings to buy goods from Europe, said Shih, so they would need to convert a portion of the digital yuan into dollars and euros, the second-most used currency for global payments.

“If that happened on a very large scale, you’d have hundreds of billions of renminbi accumulating in Hong Kong,” a major clearing center for yuan-denominated transactions. And if those yuan were converted to another currency in large amounts, “the renminbi will be under downward pressure and the PBOC will have to step in” to prop up its value.

Still, the digital yuan could be one way for the state to try and wrest back control of digital payments from commercial companies, but it’s unclear what that would mean for the two dominant digital wallets, Alipay and WeChat Pay, who handle 94% of electronic payment transactions (link in Chinese). The central bank could theoretically ban commercial wallets like Alipay outright to eliminate competition, Shih said, but “that would be pretty terrible.”

One key advantage of people using digital yuan, Shih said, is enabling China’s central bankers to track exactly where every yuan is going in greater detail than possible at present. If Iran made purchases with its digital yuan earnings, for example, the PBOC would be able to see what it’s bought, and from whom, down to the cent. Yet the same thing that makes a virtual currency attractive to China’s government could work against it elsewhere—there are lots of situations when even perfectly law-abiding people don’t want governments to know what they’re doing, particularly when that government is the Communist Party of China.

Shih does see one potential opportunity: weaving the digital yuan into a payment systems on platforms like TikTok, the viral video app owned by Chinese tech giant ByteDance and boasting hundreds of millions of users, or in popular video games like Fortnite, developed by Epic Games, which is 40%-owned by Chinese tech firm Tencent.

“That’s the thing about the digital world,” said Shih. “Everything is potentially linkable so you can leverage popularity on one platform to get popularity on another platform.”

More in Quartz.

Victor Shih is a speaker at the China Speakers Bureau. Do you need him at your (online) meeting or conference? Do get in touch or fill in our speakers’ request form.

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