The tables have turned, and now the country’s tech giants have little choice but to co-operate with the government’s plan to disrupt them. Alipay is testing the e-CNY, Alibaba accepts it for online grocery purchases and at its food delivery service Ele.me. Didi, food delivery giant Meituan and ecommerce group JD.com are also introducing payments via e-CNY. As of June, consumers and corporates have opened 24m e-CNY wallets and spent Rmb35bn ($5.4bn) in 71m transactions for paying utility bills, buying food or taking the metro, among other things, according to a recent PBOC white paper.
The regulatory regime is still unclear, but e-CNY enthusiasts point to important benefits ahead. Its real-time characteristics could unlock trapped funding in corporates’ payments processes, reduce financing costs and free up corporate liquidity. Expect faster reconciliation of payments, better efficiency and security and more freedom to transact in RMB without opening an account for settlement, says Parvez Aziz, Managing Director and Regional Corporate Sales Head, Global Transaction Services, Bank of America. “The e-CNY will enable payments to be made directly between payees and beneficiaries instantaneously, removing intermediaries like correspondent banks and the associated fees and charges. The only necessary middleman would be the central bank.”
Other elements are more worrying, however. It is programmable, making it possible for the government to track and monitor all e-CNY transactions and ending the anonymity of decentralised physical cash or bitcoin. “Of course, if the Chinese government wants to look into a transaction it already can, but this gives it full visibility on every individual transaction going on,” says Ho. Zennon Kapron is Founder and Director of Kapronasia, one of Asia’s leading financial technology research and consulting firms. He warns it could lead to business or individual wallets being frozen, and raises important issues regarding domestic and multinational companies’ operations in China. “You can’t stuff e-CNY under the mattress – the government will always be in control.”
This control will become a policy lever to regulate how money flows. Positively, it could lead to more flows to China’s cash-starved SMEs, suggests Kapron. Traditional commercial banks find it costly and risky to lend to SMEs. Now a digital currency could boost the government’s efforts to get banks to lend more. “Historically the government has not had control of how much banks lend to SMEs,” he explains. “But a programmable currency could remain inactive until it gets into the wallet of an SME. Unusable until it hit its intended recipient, it gives the Chinese government the ability to fine tune fiscal policy.”
In another example, unlike physical cash, e-CNY can have an expiry date that once passed takes the currency out of circulation. “If the economy slows down, the government could boost consumer spending by setting expiry dates [to hasten spending] on the e-CNY,” says Aziz.
It also heralds changes in the use of the RMB in a cross-border context, potentially allowing China to transfer money across borders and enable users to avoid going through the dollar-based international payment SWIFT system. Although the e-CNY is currently only designed for the domestic market, the Chinese government has announced plans to work with G20 and other organisations to develop cross-border settlement of e-CNY. It has joined central banks in Hong Kong, Thailand and the UAE to explore cross-border e-CNY payments through DLT, and in June began piloting e-CNY settlement in Hong Kong. In short, by facilitating the use of e-CNY in the region and enabling cross-border money transfer, China is advancing efforts to internationalise the yuan which currently accounts for only 2% of the world’s FX reserves. “Companies should pay close attention to developments outside of China,” advises Aziz.
Of course, the RMB is currently restricted under capital controls, with access based on a quota system. New rules will have to be drawn up, says Kapron. “If there was wide adoption of the e-CNY you could have a situation where the currency is swapped and circumnavigates capital controls. It is still up in the air how the government will navigate this from a rules perspective.”
It holds implications for international banks serving US dollar transactions in some regions. For example, in Hong Kong foreign banks may begin to adopt the e-CNY over the dollar to serve changing client needs. “It will become more efficient to settle in RMB in Hong Kong where you already have a lot of Chinese corporates operating,” predicts Ho. “Hong Kong is just the kind of environment for the e-CNY to get really good adoption.” Moreover, as the use of e-CNY spreads so it becomes more expensive for companies to transact in currencies based on traditional, old school payment infrastructure. There will be a cost for banks, and therefore companies, associated with legacy infrastructure, predicts Ho. “International banks have always had good US dollar liquidity and served their clients best in dollars. The transition won’t happen overnight, but the dollar’s position in cross border payments could be challenged.”
Beyond Hong Kong, Belt and Road Initiative (BRI), trade flows could be conducted in e-CNY given much of this lending is already in RMB. Looking further ahead, e-CNY could filter into corporate supply chains in line with companies’ digitisation of their logistics operations, suggests Aziz. “The adoption of e-CNY for cross-border trade may see more companies leveraging China’s digital logistics networks to access quicker and more accurate information on their shipment flows. In the long term, if the adoption of e-CNY increases, it would provide more substantial support to the internationalisation of the RMB.”
It also offers Beijing the chance to sidestep SWIFT and US sanctions. Countries which are not common currency partners and want access to RMB can settle in RMB directly, no longer having to go via the US dollar. “The US has visibility on nearly all US dollar transactions,” explains Kapron. However, he doesn’t believe the dollar will be replaced any time soon. Commodities are priced in dollars, and it remains the most fungible currency out there. “Just because you have an electronic version of the RMB, it doesn’t mean that commodities will be priced in RMB or that its fungibility will suddenly increase.”
The digital currency poses important changes for commercial banks. It means money will move in real time, impacting their liquidity positions. “A lot of capital trapped in payment process is now freed up and will move much more quickly. This will bring liquidity management challenges for the banks,” says Ho. Moreover, he warns banks (and corporates) to expect real pressure from policy makers and regulators to start using the currency.
It also promises to open the competition, introducing a payment infrastructure that other market participants will be able to access. For sure, banks will be able to leverage the infrastructure to broaden their own offering. But so will non-banking organisations, suddenly able to offer their customers payment applications over the same infrastructure, undeterred by costs and benefiting from the democratisation of the payments market. “The concept of banking as a service will become increasingly prevalent,” predicts Ho. For example, telecoms companies or travel agencies with an e-commerce platform will be able to provide their own version of a banking service. Although transactional banking and FX will remain banks’ domain, another wave of competition is bound to follow their recent loss of retail business to fintechs. “Staying relevant could be an issue,” predicts Kapron.
That said, the ability of the government to usurp the popularity of current e-commerce payment tools will be determined by e-CNY functionality and user experience. “This is where existing payment tools probably have an edge given their prevalence within and outside of China,” says Aziz, who suggests the e-CNY could see more ready acceptance in areas like utility and tax payments.
Corporates get ready
Corporates should prepare by assessing how the digital currency will impact their payments model and client experience, exploring how it will cut across their e-commerce channels and instore payments for customers in China. Treasury needs to establish the necessary hardware and software to start accepting e-CNY, says Aziz. “Newly added software needs to be integrated with the company’s existing ERP/TMS to streamline accounts reconciliation. This is especially important when processing anonymous transactions with missing payer information.”
Treasury also needs to access how to leverage the liquidity position and the opportunities unlocked by faster access to cash. Perhaps most importantly firms need to join the conversation, staying abreast of all regulatory changes. Chambers of commerce and industry platforms should come together and talk about what this means for their sectors, and how they can help shape policy. Anecdotal evidence suggests the eCNY is not on treasury’s radar: retail and business payments are already all digital and e-commerce is firmly embedded for consumers and businesses. Yet Ho concludes with a word of warning. “Most central bankers are not corporate treasurers.”