China’s e-yuan like ‘a double-edged sword’, and mishandling it carries considerable financial risks

Increased security and greater internationalisation of the yuan are among the benefits offered by China’s new digital currency

But analysts caution that widespread adoption must be gradual, as embracing the e-yuan will be ‘an educational process and a cultural shift’

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Signs indicate where China’s e-yuan can be used at a supermarket in Shenzhen, China. Photo: Bloomberg

Published: 10:00pm, 18 Jul 2021Updated: 10:27am, 19 Jul 2021

To mitigate “financial risks”, China needs to weigh the pros and cons of loosening its strict capital controls using a central bank digital currency, according to the director of digital finance at China’s prestigious Peking University.

The so-called e-yuan is mainly intended to be used in the domestic retail sector, but a big question that is often discussed is whether it could be useful in internationalising the yuan, in addition to helping with China’s market liberalisation efforts and enabling the central bank to track capital flows.

On one hand, the burgeoning e-yuan serves to enhance authorities’ surveillance capabilities in China’s cross-border payment system, effectively allowing for its currency to be monitored in real time, according to Peking’s Huang Yiping, who also specialises in macroeconomic policy and international finance. This would help authorities detect economic risks faster, and deploy mitigation efforts earlier.

“But on the other hand, there will be speculators and [bad actors] who might also use the technology to do things very fast,” Huang said. “I tend to believe that technology is always a double-edged sword. The main concern is that, if you don’t do this properly, there could be significant financial risks or even a financial crisis.”

He was speaking during an online panel discussion about central bank digital currencies, hosted by the SCMP’s Redefining Hong Kong Series, on Thursday.

China’s financial services sector remains largely closed to foreign investors, and cross-border money flows are restricted by draconian capital controls that are meant to prevent an exodus of outflows in a crisis. But the strategic road map laid out this year in China’s 14th five-year plan indicates that this is going to change, Huang said.

As the United States has stepped up in its capacity to impose financial sanctions on China, it is more important than ever to bypass the US dollar by increasing the yuan’s use in global finance, trade and investments.

“The opening up [of China’s] capital account, and also the internationalisation of the currency would be key policy goals to be achieved,” Huang said. “But you still have to be very gradual, because you have to [strike a] balance between the benefits of an open capital account with the risks that come with it.”