The global digital revolution is transforming the financial landscape, and at the forefront of this shift is China’s aggressive push toward launching a central bank digital currency (CBDC). With mobile payment platforms like Alipay and WeChat Pay already dominating daily transactions, China’s cashless society is rapidly evolving. Now, the People’s Bank of China (PBOC) is transitioning its CBDC from research to real-world implementation, positioning itself as a global leader in digital currency innovation.
This article explores the design framework of China’s upcoming CBDC—often referred to as Digital Currency Electronic Payment (DCEP)—and analyzes its potential macroeconomic implications on monetary policy, the banking system, and the internationalization of the renminbi (RMB).
What Is a Central Bank Digital Currency (CBDC)?
Central bank digital currencies have become a focal point for global financial institutions such as the International Monetary Fund (IMF) and the Bank for International Settlements (BIS). The growing interest stems from several key factors: advancements in digital payment technologies, the rise of cashless societies in regions like Scandinavia, and the emergence of decentralized cryptocurrencies based on blockchain and distributed ledger technology.
A CBDC is a digital form of a country’s法定货币, issued and backed by its central bank. According to BIS, CBDCs can be classified across four dimensions:
- Issuer: Central bank (vs. private entities)
- Form: Digital (vs. physical)
- Accessibility: Retail (for the public) or wholesale (for financial institutions)
- Technology: Account-based or token-based
Combining these, four types of CBDCs emerge:
- Retail account-based
- Retail token-based
- Wholesale account-based
- Wholesale token-based
China’s PBOC has confirmed its focus on retail token-based CBDC, designed for everyday use by individuals and businesses. This model functions similarly to physical cash but in digital form—stored in electronic wallets and transferable peer-to-peer without intermediaries.
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China Leads Global CBDC Development
China began exploring CBDC concepts as early as 2014, when then-PBOC Governor Zhou Xiaochuan called for research into the feasibility of a state-backed digital currency. By 2017, the PBOC established the Digital Currency Research Institute, accelerating development efforts.
In 2019, Mu Changchun, head of the institute, announced that China’s digital currency was “on the verge of launch,” outlining a two-tier operational model. Around the same time, Huang Qifan, former mayor of Chongqing and vice chairman of the China International Economic Exchange Center, predicted that China could become the first major economy to issue a national digital currency.
Although no official launch date has been set, pilot programs have been initiated in cities like Shenzhen and Suzhou, with plans to expand nationwide. These trials are critical for testing infrastructure, user adoption, and systemic resilience.
Compared to other nations still in early research phases, China’s progress represents a significant leap forward in the global race for digital monetary sovereignty.
Design Features of China’s CBDC
Based on public statements and technical disclosures, China’s CBDC will have the following core characteristics:
1. Replaces M0 (Cash), Not Broader Money Supply
The digital currency will substitute physical cash (M0), not deposits (M1/M2), emphasizing its role as a payment tool rather than a savings vehicle. Since most bank deposits are already digitized, there’s no need to replicate them under a CBDC framework.
2. Two-Tier Operational System
To avoid disrupting financial stability, the PBOC will use a dual-layer distribution model:
- Tier 1: PBOC issues CBDC to commercial banks and authorized intermediaries.
- Tier 2: These institutions distribute digital currency to consumers and businesses.
This ensures that traditional banks remain central to distribution while preventing the central bank from directly competing with them.
3. Technology-Neutral Approach
While blockchain is considered, it is not mandatory. The system prioritizes scalability—targeting 300,000 transactions per second, far exceeding current blockchain capabilities. Centralized databases may be used instead to ensure speed and reliability.
4. No Interest Payments
To minimize competition with commercial bank deposits, the CBDC will not earn interest. This reduces the risk of mass fund migration from banks to digital wallets, which could destabilize credit creation.
5. “Controllable Anonymity” for Privacy and Compliance
Transactions will be traceable by authorities to combat money laundering, tax evasion, and terrorism financing. However, users will retain a degree of privacy—mirroring cash usage—under a “controllable anonymity” framework.
6. Offline Payment Capability
Even without internet access, users can transfer funds via near-field communication (NFC) between devices. This ensures usability in remote areas or during network outages.
Enhancing Monetary Policy Effectiveness
A well-designed CBDC can become a powerful tool for monetary policy. By directly influencing the supply and cost of money, central banks gain greater control over economic activity.
If China ever decides to pay interest on CBDC, it could enable negative interest rate policies (NIRP) without triggering a cash rush. Normally, when rates fall below zero, people withdraw cash to avoid losses. But if high-denomination cash is phased out and CBDC becomes dominant, rates could go negative—effectively penalizing hoarding and stimulating spending.
This would eliminate the “zero lower bound” problem and enhance policy flexibility during economic downturns.
Risks to Commercial Banks’ Role
The rise of CBDC poses structural challenges to traditional banking:
- Disintermediation: If consumers shift deposits to interest-bearing CBDC wallets, banks could face liquidity shortages.
- Reduced Lending Capacity: With fewer deposits, banks may struggle to extend credit—potentially slowing economic growth.
- Loss of Data Advantage: Payment data currently held by banks may flow to third-party wallet providers like Alibaba or Tencent.
Although current design avoids interest payments to protect banks, future shifts could threaten financial stability. Regulators must balance innovation with systemic risk mitigation.
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Accelerating RMB Internationalization?
A successful CBDC rollout could boost the global use of the renminbi. With seamless cross-border transactions and lower remittance costs, DCEP might encourage foreign adoption—especially in Belt and Road Initiative countries.
However, full internationalization requires more than technology:
- Capital account liberalization
- Deep and liquid financial markets
- Strong institutional trust
Currently, China maintains strict capital controls, limiting offshore RMB flows. As former PBOC governor Zhou Xiaochuan noted, the primary goal of DCEP is domestic efficiency, not global dominance.
Still, being first-mover grants strategic advantage. If DCEP gains traction abroad through trade or tourism, it could gradually expand RMB’s footprint.
Frequently Asked Questions (FAQ)
Q: Will China’s CBDC replace cash completely?
A: While full replacement is possible long-term, cash will coexist with CBDC for years. The transition will be gradual to ensure financial inclusion and system stability.
Q: Can foreigners use China’s digital currency?
A: Yes—pilot programs allow limited use by tourists and foreign businesses. Full international access depends on regulatory frameworks and cross-border interoperability.
Q: Is China’s CBDC based on blockchain?
A: Not necessarily. While blockchain is an option, performance demands favor hybrid or centralized systems capable of handling high-volume transactions.
Q: Does the CBDC compete with Alipay or WeChat Pay?
A: No—it complements them. Unlike third-party platforms that rely on bank accounts, CBDC operates independently but can be integrated into existing payment apps.
Q: Could CBDC enable government surveillance?
A: Authorities can trace illicit activity under “controllable anonymity,” but routine transactions remain private. Safeguards aim to balance security and civil liberties.
Q: What happens if my phone with CBDC is stolen?
A: Like physical wallets, loss poses risk—but wallet providers may offer recovery options similar to password resets or biometric locks.
Final Outlook
China is poised to become the first major economy to deploy a nationwide central bank digital currency. The PBOC’s cautious yet determined approach reflects both technological ambition and financial prudence.
While DCEP promises greater payment efficiency, enhanced policy tools, and potential international influence, it also brings risks—especially for traditional banks and financial stability.
As pilots expand and public adoption grows, the world will closely watch how China navigates this transformative shift.
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