Mobile payments are reducing the need for cash in China, to the point that the Chinese central bank is preparing to issue new money electronically. Photo: WeChat

China’s central bank is trialing a scheme to replace paper money with a fully-fledged digitalized version of the Renminbi in some selected cities, as ATMs and counters at banks are becoming redundant in a nation where mobile payments rule.

A screenshot of what appears to be a preliminary design of the 1 yuan denomination of the e-RMB issued by the People’s Bank of China and stored in an Agricultural Bank of China e-wallet has been circulating online.

This has started discussions about why the central bank as the printer of the national currency also wants to jump on the bandwagon to digitalize the redback. The picture shows the new layout of the currency retains the portrait of Mao Zedong that appears on all banknotes, but against a simplified background and with fewer motifs.

The 21st Century Business Herald and National Business Daily revealed that the PBoC and a number of commercial banks had already been testing e-RMB transactions in a whole plethora of scenarios, from retail to reserve payments to improve its functionality, with a particular emphasis on speed and encryption.

Some cadres and developers involved in the program have reportedly used the e-RMB to pay their party membership dues.

The look of the e-RMB is evocative of the design of the paper money, which is becoming hard to find thanks to the nationwide adaption of electronic ways to pay bills. Photo: WeChat
A 1 yuan banknote.

The PBoC will stage trials in Shenzhen, Suzhou, Chengdu and Xiong’an, a new national development zone on the outskirts of Beijing, to assess the reliability of the digital currency and gauge the potential for more applications.

The pilot scheme will be expanded to cover high-denomination banknotes. A nationwide rollout is expected in two to three years when the PBoC aims to reduce the amount of hard cash it needs to print.

That goal is borne out by the fact that the annual increase in China’s M0 supply – the monetary base that is the total of all physical currency including coinage – has slackened to 3-4% since 2012 and is largely impervious to the surges in credit and loans.

This is compared with the double-digit growth in M0 throughout the first decade of the 21st century, according to a report by CITIC Securities. China’s M0 supply stood at 8.3 trillion yuan (US$1.17 trillion) in 2019.

In Suzhou in eastern Jiangsu province, civil servants whose salaries are paid via accounts maintained by the “big four” SOE lenders – Bank of China, Industrial and Commercial Bank of China, China Construction Bank and Agricultural Bank of China – will get half their monthly pay in the form of e-RMB, starting from May.

McDonald’s, Starbucks and Subway were among the 19 mass consumption brands and retailers participating in the trial. Some of the payment scenarios related to the Beijing 2022 Winter Olympics are also included in the tests.

China is leading the charge to issue a digitalized version of a national currency, leveraging its lead in cashless transactions. Photo: WeChat

The digital yuan, which has already been five years in the making, will have the same legal tender status as cash, whose issue and use will be bound over by the same set of anti-money laundering and other rules and merchants and individuals should not reject any payments or remittances made via e-RMB.

The Chinese central bank stresses that the e-RMB is a digitalized version of Chinese money, but other forms of money supplies and savings like M1 (the total amount of M0 outside of the private banking system, the amount of demand deposits and other checkable deposits) and M2 (M1 plus savings accounts and money market accounts etc) will remain unchanged, meaning paper money already issued and in circulation or deposits will not be affected and the velocity of the money in circulation will not be disrupted either.

PBoC governor Yi Gang told a conference earlier this month that cash issue, storage and recycling programs must also be reformed to keep up with the progress of the trial of the e-RMB.

Meanwhile, the PBoC’s Digital Currency Research Institute that is tasked with the research and development of the e-RMB, advised against a blockchain-based approach to digitalizing the currency or related payment systems, stressing that blockchain’s decentralized and distributed digital ledger that records transactions across many computers runs counter to the PBoC’s role of centralized bookkeeping and administration.

It is also believed that with the PBoC’s backing, the e-RMB will gain currency and give the duopoly of AliPay and WeChat Pay a good run for their money.

But an official with the central bank told state broadcaster China Central Television that the money processed by third-party platforms like AliPay and WeChat Pay belongs to the settlement of commercial deposits as users must link their bank accounts to use related services.

So transactions facilitated by these platforms fall in the category of M1 and M2 and would not be affected when part of the nation’s M0 supply is digitalized. He added that rolling out the e-RMB was never meant to supplant any existing mobile and online payment solutions.

Payments via the e-RMB could be contactless and transactions can be conducted via bluetooth and encrypted NFC when two mobile phones with electronic wallets get close to each other. This is different from Alipay and WeChat Pay, that rely on cellular networks, and one can use the e-RMB without the internet, just like paying physical cash.

A customer uses WeChat Pay at a fast-food store in China. E-payment is part of the everyday life of numerous Chinese people as cash is disappearing. Photo: Xinhua

Observers also say that now that payments made through AliPay and WeChat Pay far exceed cash transactions and those handled via credit cards, and with overall M0 supply plateauing, as much as half of the new money supply from the PBoC will be in the form of e-RMB.

Last year, PBoC deputy director Mu Changchun noted that the new digital currency would be similar to Facebook’s Libra coin in design terms and would be eligible for use just as long as there was a phone or any other mobile device that could support the e-RMB.

Explaining the thinking behind the plan, Mu said: “It is to protect our monetary sovereignty and legal currency status.” His remarks chime with a report from research and campaign group Positive Money, arguing that central banks worldwide should issue a digital version of cash to prevent the “privatization” of money by commercial entities and IT firms.

The still-raging novel coronavirus pandemic and the higher health and hygiene awareness among the masses have also added impetus to the trial of the digital currency. While there has been a dramatic drop in the cash in circulation in Wuhan, the initial ground zero of the viral outbreak, most retailers there refuse to accept coins or paper money as a precaution against the highly contagious pathogen.