Shanghai-based fintech veteran Rich Turrin says that the launch of China’s new central bank digital currency (CBDC) will serve to greatly expedite the internationalisation of the renminbi.
In an interview with China Banking News, Turrin said that one of the chief advantages of China’s new CBDC is its ability to permit extremely nuanced and fine-tuned control of currency flows, which will permit greater internationalisation of the renminbi without the need to fully open the country’s capital account.
“What CBDC’s allow China to do is to have what I would call partial convertibility or partial liberalisation of currency,” said Turrin
“Without a digital currency China has always been forced into this concept of having a binary choice between the currency being freely convertible – yes or no. You either open the currency – make it freely tradable on Western markets, or you don’t.
“There are intermediate measures that they have taken like dim sum bonds and all kinds of other offshore RMB activities. But basically it was a zero or one binary choice.
“With the CBDC China can say we can selectively pick countries and institutions that we want to use the digital RMB.
“And suddenly you can have part of your trusted trading universe using digital RMB, without needing to have a fully open and liberalised RMB.
“So you’ve gone from a binary choice to a choice that is much more nuanced and has many different flavours of grey in between.”
Turrin points out that this ability to gradually or partially open the capital account will dovetail well with China’s existing international trade initiative
“It’s going to be big for China because with the Belt and Road strategy, where already some countries are already doing some business in RMB, they can promote the renminbi for greater volumes of trade.
“You’re going to be able to do business with a given country in offshore digital renminbi and you’re going to be able to pay for commodities such as oil in that currency, but you’re going to be able to keep it out of normal currency markets.
“And this gives them a choice that is far more palatable. China can find suitable trading partners that it’s already doing business with, take those commodities or other tradable goods and convert them into renminbi values, while using digital renminbi accounts for both trading parties.
“This is really big, because by that point you’ve basically internationalised the renminbi.”
The digital internationalisation of the renminbi will have huge implications for the global monetary system, which has already created deep concern amongst some US analysts and observers.
“It’s certainly a much cleaner means of internationalising the RMB because you get to select who uses it with offshore RMB accounts” said Turrin.” This is a concern of course for the Americans because you can avoid sanctions,
“You control this payment system and it doesn’t go through SWIFT and it doesn’t go through the international banking system, and you can transact with whom you deem worthy of transacting with, while sidelining existing financial infrastructure
“When you read some of the American policy documents on CBDC, the policy wonks are alarmist and telling the US government that they really need to pay attention to this development.
“The government however, is saying we have the reserve currency and nothing is going to change, and of course there’s too much other stuff to pay attention to.
“The US will complain a lot when China launches this and say that they didn’t know, but in the meantime China’s been’s pushing out press releases on central bank digital currency for five years plus now.”
According to Turrin the amount of time that China has invested into the research and development of CBDC attests to the sheer complexity and critical importance of the undertaking.
“Anyone who says China did this as a response to Libra, please check the press releases from the Chinese government that was working on this for years prior to Facebook ever launching its white paper.
“What people have to be aware of is that this will be a very deliberate and long-term process. PBOC has to account for many things – how they have to keep ledgers with the banks, and how the banks all have to set up a separate set of ledgers for digital.
“The reason that China is so deliberate with this is because it impacts local banks and central banks – basically the entire chain of the monetary system.
“It’s extremely sophisticated and complex, and it has many moving pieces at levels that outside observers just don’t see.”
For this reason Turrin expects the final roll-out process itself to remain cautious and deliberate, even following the launch of trials in the four cities of Suzhou, Shenzhen, Chengdu and Xiong’an.
“The fact that you see this roll-out in four cities, and the fact that you see this experimentation going on I think is very, very important.
“It speaks to how researched and thoughtful this entire process has been. There is no sense that this is something tossed out in a hurry.
“They’re going to work out all the kinks locally, to see how it works its way through the banking system. It will be used in domestic markets long before it makes that leap to international RMB, where it starts being used to settle cross-border trade.
“Even then, expect a gradual roll-out, this is not about suddenly trying to ‘kill the dollar.’
“It will be further polished up, and when they finally do launch it will be very much ready to go, because no one wants to make any mistakes with this.”
Rich Turrin is the author of the best-selling “Innovation Lab Excellence” and soon to be published “China’s Digital Currency Revolution.” He previously headed IBM’s Fintech Innovation Lab in Singapore and IBM’s banking risk technology team in China after a 20 year career in banking.