China and its central bank digital currency

The People’s Republic of China (PRC) has abandoned its previous restraint and is now actively shaping the global order of the 21st century. For years, party and state leaders followed the first step of Deng Xiaoping’s counsel for the field of foreign policy: “Hide your strength, bide your time”. Under Xi Jinping’s leadership, it would appear that the time has now come. China has shifted the logic underlying its foreign and security policy with a view to its increased political and economic power, thereby reprioritising a variety of strategic interests.

The Chinese government is keen to use new digital and disruptive technologies in its quest for a more powerful position at all levels of the global political system. China has continuously invested in digital currencies and crypto-based payment systems in recent years and is willing to become the first major economy to launch an official central bank digital currency (CBDC). The opportunity to play a leading role in shaping the new field of CBDCs, establishing favourable structures, and setting new standards are all in line with Beijing’s general geopolitical approach to increasing its degree of independence from the West. This analysis by the Friedrich-Ebert-Stiftung (FES) picks up on these ambitions; its two authors, Nadim Baker and Felix Klein, outline the opportunities and risks posed by digital currencies in the context of China’s objectives and have implications for Europe and, ultimately, the European Central Bank (ECB).

The authors explain how the emergence of decentralised cryptocurrencies is revolutionising and challenging traditional finance. Central banks face the challenge of responding to this development and providing a regulated approach to the new global digital economy. While new CBDCs are in development, standards have not yet been finalised, and the central banks or governments that can establish their CBDCs first will almost certainly be the ones to set (the initial) international standards. Based on their detailed analysis of Chinese efforts and attempts, Baker and Klein recommend that the development of digital central bank currencies, such as the e-yuan in China, be met with a more sustained European response to help shape the emerging standards for the digital economy in a European way. The ability to track and analyse payment flows in real-time offers a new opportunity to improve monetary policy sustainably. According to the authors, Europe needs to take a comprehensive approach to the establishment of a digital euro as a competitive component of the global digital economy.