Faculty & Research


The People's Bank of China(PBOC) last month kicked off internal tests of its digital currency in four large cities, a crucial step on the path to the first electronic payment system by a central bank. Xiao Xiaolin, professor with Peking University’s Guanghua School of Management, reveals detailed progress of the program and its potential impact on the economy.


Generally known as a Central Bank Digital Currency(CBDC),China’s digital currency is a digitized form of legal currency yuan issued by and under direct control of its central bank. However, unlike decentralized cryptocurrencies like Bitcoin, China’s digital currency is backed by the country's credit. According to Xiao, this digital currency aims to replace money in circulation(M0),but the current RMB system will remain. Cash in actual circulation in China took up only four percent of M2 in 2018, and the figure is still shrinking.“Digital Currency and Electronic Payment is the result of the constant progress of modern technology and the evolution of payment methods,” Xiao said.

In response to doubts over the necessity of a digital currency when electronic payment is already ubiquitous in the country, Xiao noted that a physical currency is prone to being counterfeited and laundered while a digital currency has no such problems, and the current electronic payment system is closely tied to users’ bank accounts and is not anonymous payment-friendly.

According to Xiao, the digital currency will help increase China’s edge in the global competition of mobile payment and fin-tech while boosting the efficiency of the country’s monetary policy transmission.“In the long run, the digital currency will help bring yuan to neighboring countries and globalize the country’s RMB.”


In 2014, Zhou Xiaochuan, then head of China’s central bank, already floated the idea of a digital currency. The bank then founded the world’s first official digital currency research center, inviting leading commercial banks and financial institutions on board of the research and development of the program. Despite an early start and vigorous research efforts, China’s digital currency program has been shunning global media hype for years. According to Xiao, now it is“very mature and almost ready for official use.”

“Many countries’ central banks are interested in the idea, but most are still studying its feasibility and have yet to delve into research and development,” Xiao said, adding that the PBOC’s efforts have been discreet and also forward-looking. The PBOC has so far possessed a total of 97 digital currency-related patents that cover a wide spectrum of aspects including digital currency generation, distribution, circulation, verification, conversion, recovery as well as the digital wallet system. According to Xiao, it should be possible by now to realize the digital currency’s flow from the central bank to terminal users’ electronic payment usage via commercial banks.


Xiao said currently the PBOC is stepping up the test of the digital currency’s use in the retail environment. In Nov. 2019, China’s four major state-owned banks and three leading telecom giants were the first batch to join the pilot test. Right now, the digital currency is already used by bank employees in Shenzhen to pay Communist Party of China membership fees. In eastern city Suzhou, corporate and public service employees will receive transportation subsidies in the form of the digital currency. McDonald’s and Starbucks are among businesses in Xiong’an, a satellite city southwest of Beijing, that took part in the trial.

“China’s digital currency is making a breakthrough in the retail realm,” Xiao said, adding that other countries that include Singapore, Canada, Japan and the EU are focusing on the wholesale aspect and digital currency’s role in boosting the clearing efficiency.” Retail payment poses more challenges for a central bank’s digital currency but can also be much more rewarding in helping a digital currency exert groundbreaking changes,” Xiao said.“The comprehensive revolution will come if a digital currency is able to exert its influence in retail, wholesale and then the entire macroeconomy level.”

The PBOC’s digital currency program is said to feature a function that enables two cell phones with its digital wallets to transfer money in close proximity without the need of a network.

Xiao noted that the digital currency will also break the mobile payment barrier by realizing smooth money flow between different banks and mobile payment brands, while also allowing special programming that caters to smart contracts in specific scenarios such as poverty and disaster relief. Fund transfer and management has long been a big problem for the country’s high-precision poverty relief drive, and the digital currency, according to Xiao, can be programmed to track the flow of fund to prevent improper use.


Many are concerned that the digital currency will crowd out the businesses of commercial banks and mobile payment giants such as Alipay and WeChat Pay, and Xiao dismissed this worry:“China’s digital currency is designed to follow a two-tiered structure in which the digital currency is issued by the central bank to commercial banks which, in turn, release it to the public. This way, huge impact on existing financial institutions can be prevented.”

“The two-tiered structure caters to China’s reality,” Xiao said,adding that issuing the digital currency directly to a population of 1.4 billion will lead to huge payment and clearance burden on the central bank. She also hinted that more payment third parties will be allowed to join commercial banks in the two-tiered system to form a “benign competition mechanism.”

Comments previously made by PBOC officials indicated that the central bank had no intention to compete with commercial banks and other payment brands in the electronic payment field and only aimed to guide the construction of the entire digital currency system and boost market vigor and service quality from a higher level.

According to Xiao, China’s digital currency, backed by the sovereignty, will become a much sought-after asset for its security and liquidity once payment of interests are taken into account and might potentially change the current financial status quo. However, the central bank does not adopt interests in the initial stage of the digital currency so its impact on commercial banks will remain small in the near future. Meanwhile, the currency’s digital wallets will boost interactions between users and banks, which can serve as an opportunity for banks to develop more products to consolidate clients’loyalty.

With all the hypes around China’s digital currency, Xiao urged people to keep coolheaded and reasonable as the program is still in the trial stage and potential problems might crop up that need solving. Meanwhile, the impact of the digital currency on the entire economy once it was put to official use is still in urgent need of deeper research.

© 2019 Guanghua School of Management Peking University