Interview with PIIE Senior Fellow Martin Chorzempa on the Launch of China’s Digital Renminbi


China Banking News recently spoke to Martin Chorzempa, a senior fellow at the Peterson Institute for International Economics and an expert on Chinese financial liberalisation, about the current state of efforts by the People’s Bank of China (PBOC) to launch its own Central Bank Digital Currency (CBDC).

China Banking News: Much talk has been made about the Digital Renminbi being the first CBDC to be launched in the world. How does the scheduling of the Digital Renminbi’s launch compare to that for the CBDC’s of other countries?

Martin Chorzempa: There is currently no official launch schedule, but there is enormous pressure to have some sort of scaled-up release ready for the Olympics in Beijing, including probably for foreigners.

Among advanced economies, Sweden has been the most consistently in support of issuing a CBDC and is probably the furthest along.

However, even it has not committed to issuing an “e-Krona,” and its pilot program is for a technical solution more like what the Fed is doing with MIT, probably a year at the very least away from putting anything in the hands of

Some emerging market counties have already launched retail pilots like China, but those have generally not been viewed as successes.

What are some of the first-mover advantages of early CBDC adoption for China?

One benefit could be that other countries, especially developing countries and other EM’s, might develop their own CBDCs from the ground up with interoperability with China in mind, making it easier to use internationally.

They might also decide to purchase or adopt some of the underlying technology, since China would at that point have a proven solution.

It also gains some soft power by demonstrating its fintech prowess and ability to do a difficult task that many other countries hope to do themselves. Benefits like financial inclusion, cheaper payments, etc. have yet to be proven though.

What are the disadvantages of early adoption of the CBDC, in terms of issues such as rapid technological change and competition with other digital currencies?

Early adoption’s main disadvantage is taking largely unknown risks. One mistake in the code used to manage the system, or a cyberattack, could be disastrous, undermining faith in the currency and causing chaos.

Everywhere in the CBDC design process there are tough trade-offs, and China does not have the benefit of learning from how others balanced it.

How will China’s early push for a CBDC impact ongoing efforts to internationalise the renminbi and encourage its usage abroad?

While often stating that eCNY will help internationalize the RMB, PBOC officials have been overall consistent in their messaging that the primary motivations for CBDC development are domestic, and I have yet to see a detailed argument about how the eCNY will remove the current barriers to RMB internationalization, like capital controls.

If the enhanced control over the currency leads them to feel comfortable loosening capital controls on the digital currency, and if they allow people outside China to open wallets and transact eCNY, then it could make a difference.

What has China’s strategy been when it comes to the adoption of different trials sites and overall scheduling?

The trial sites chosen thus far are in quite advanced areas of China, and they have sensibly gradually scaled up the functionality, for example adding offline payment functions that are much more complex to manage in later trials once the basics of the wallets proved themselves.

One area to watch will be whether they soon expand to less developed areas with less robust tech infrastructure to test the eCNY’s ability to improve financial inclusion. Another will be the integration with existing payment platforms.

I suspect that many thorny issues remain to be resolved behind the scenes, and that a widespread roll out is still about a year away.

How do you expect other central banks such as the Federal Reserve to respond to a successful launch of the Chinese CBDC?

I expect other central banks will accelerate their efforts to launch their own digital currency if China’s eCNY is successful, and proves the benefits that are largely theoretical today of CBDC.

Of course, if it does not make that much of a difference to financial inclusion, efficiency, etc. domestically in China, then there will be no added urgency.

Once fully implemented how do you see the Chinese CBDC impacting monetary policy, cross-border finance, and other areas of economic policy execution?

If the CBDC becomes the main way that Chinese transact, the PBOC will gain a whole new toolkit through its direct control and surveillance of the system.

They could adjust transaction costs to encourage money to flow into certain sectors, block individuals and
organizations from opening accounts, monitor for tax compliance, impose negative interest rates, and eventually add smart contracts.