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China’s digital yuan plan to counter US dollar faces headwind

China’s extensive efforts to make its digital version of the yuan more acceptable globally as a payment mechanism and break the dominance of the US dollar may not yield the desired results in the post Covid era with growing anti-China sentiments across the world. Besides, other countries including Japan and Russia are firming up plans to roll out their own digital currencies to counter China’s move.

The Covid 19 pandemic has also highlighted the need for diversification of supply chains.

“Beijing has touted the digital yuan as a futuristic currency that will make buying things more convenient and secure. Officials also say that it could help those who don't have access to bank accounts and other traditional financial services,” a report by CNN said.

A digital currency can facilitate easy transactions and payment to other countries by eliminating the dollar-based international payments systems.

Though China, so far the biggest supplier of goods worldwide, aimed at pushing international trade through its digital currency, dynamics have changed amid the Covid 19 pandemic as Beijing has come under the spotlight for its political and economic aggression. Apprehension among other countries is growing.

“The Chinese currency is not market driven and therefore it may not be easy for China to make a major breakthrough with its digital currency. It will not be able to break the monopoly of the US, especially at a time when there is global uncertainty in the wake of Covid 19 pandemic and many non Chinese companies have already shown interest in moving out of the country to diversify their supply chains,” DK Srivastava, EY’s chief economic adviser told IndiaNarrative.com.

Srivastava said that China’s ambition of making its digital currency more acceptable globally could have borne fruit had it happened prior to the Covid pandemic, when countries were more open to transact with China.

While the American dollar was used for almost 90 per cent of the international transactions in 2019, the currency is also used for over 60 per cent of all foreign exchange reserves. The Chinese yuan accounts for a minuscule proportion of global trade and payment.

Federation of Indian Export Organisations (FIEO) director general and CEO Ajay Sahai said that India need not worry about the use of Chinese digital currency at this point. “There is no need to worry at this point but at the same time it is always a good idea to remain watchful so that appropriate measures can be taken if need be,” he said.

<strong>What is digital money or digital currency?</strong>

Digital or virtual currency is issued by central banks and is known as “central bank digital currency” or CBDC. This facilitates cashless payments and can be undertaken by smartphones or electronic cards.

The People’s Bank of China is a leading issuer of CBDC. China, which launched its digital currency earlier this year as a pilot programme, provided 200 digital yuan to each of 150,000 citizens.

<strong>Japan, Russia among other countries looking to launch digital currencies</strong>

Several countries are experimenting with this new form of payment mechanism.

A recent report in the Japan Times said that Tokyo is preparing to issue its own digital currency in both the public and private sectors. According to the newspaper, Bank of Japan will launch a feasibility study on its digital currency in fiscal 2021 starting in April.

“Demand (for a CBDC) could be suddenly strong. We aim to be well-prepared to respond to changes in our environment,” the Japan Times quoted Bank of Japan (BoJ) governor Haruhiko Kuroda as saying.

Russia too is preparing a concrete plan for its own virtual money. According to a report in the Finance Magnates, Russia’s largest state-owned lender, Sberbank, is set to launch its own digital currency next year.