ONE of the biggest economies in the world has become the first major country to launch the maiden digital currency, the electronic renminbi (e-RMB).

China has over the past 40 years achieved trade, economic and military-geostrategic globalisation. However, it has failed to achieve financial globalisation.

To understand why, let’s take a step back and analyse the basics of the Chinese currency first. The renminbi translates into people’s money. The yuan is the base unit for the RMB. It is the most dominant currency in the realm of trade globalisation where China has become the highest-exporting nation in the world.

This obviously did not happen overnight. One of the most significant milestones of Chinese trade domination was achieved back in 2002 when China became a member of the World Trade Organisation (WTO) at the behest of the United States of America. This alone was a game changer that allowed China to export in large quantities to the rest of the world year upon year. From there on, China became a global economic leader. Since 1991, the Chinese economy has never grown less than six per cent, reaching the peak of 14.2pc in 2007, ending up being a $14.1 trillion economy as of today.

The e-RMB will start small, but disrupt traditional banking and the post-Bretton Woods System of floating exchange rates

China began giving credit lines to needy countries as a key player in economic globalisation. Many of the borrowers that were unable to repay had to convert the debt into equity – Sri Lanka being just one of the many examples. As a result, companies in China grew massively and turned into giant multinationals.

The Chinese military also achieved geostrategic globalisation. One of the prime examples was the opening up of naval bases in Djibouti located in the Horn of Africa after striking a deal with President Ismail Omar Guelleh in 2015. This was the first overseas military base for China and was built at a cost of around half a billion dollars. This facility significantly increased China’s power projection capabilities in the Indian Ocean.

But despite everything, China failed miserably in the realm of financial globalisation. This was primarily because the Chinese financial markets were not open to the rest of the world. This was mainly because of the policies and sentiments of Chinese Communist Party. As a result, the influence of the Chinese currency could never grow like that of the dollar, which remained the reserve currency. Oil, gold and other commodity prices were quoted in dollars. China realised it had to displace the dollar as reserve currency to fulfil its dream of becoming the global superpower by 2050. This idea gave birth to the e-RMB.

The launch of the e-RMB can be explained by six reasons.

One, replacing the dollar. A sovereign digital currency provides a functional alternative to the dollar settlement system and blunts the impact of any sanctions or threats of exclusion at both country and company levels.

Two, financial globalisation of China. It may also facilitate the country’s integration into globally traded currency markets with a reduced risk of politically inspired disruption.

Three, more control. China’s central bank was unable to monitor cash flow in real time because cash transactions were offline and transaction data from existing payment platforms was scattered.

Four, the rise of private money. There is a growing sense that central banks worldwide should issue a digital version of cash to prevent the “privatisation” of money by commercial entities and IT firms.

Five, Chinese blockchain existence. China has in the recent past made its Blockchain-based Service Network or BSN available for the global commercial use, according to reports. The BSN, led by the Chinese government–backed think tank State Information Centre, is a global infrastructure that claims to help projects create and run new blockchain applications at a lower cost. It also aims to accelerate the development of smart cities and the digital economies.

Six, the impact of the coronavirus. The pandemic and greater 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 cash in circulation in Wuhan, most retailers there refuse to accept coins or paper money.

What happens next? Emerging economic powers, such as India, Brazil and Russia will now be evaluating the adoption of the new alternative financial economic system to remain relevant. Interestingly, Chinese central bank’s Currency Research Institute does not want a blockchain-based approach as it is a decentralised and distributed ledger. Therefore, the sovereign digital currency will have to be pegged to the national currency. The e-RMB will have the same legal tender status as cash.

And what happens to the existing system? The other forms of money supplies and savings — like M1 that is the total amount of M0 outside of the private banking system, the amount of demand deposits and other checkable deposits; and M2 that is M1 plus savings accounts and money market accounts etc — will remain unchanged.

Actually, a part of the nation’s M0 supply will be digitised while M0 supply will be the monetary base that is the total of all physical currencies, including coinage. China’s M0 supply stood at 8.3 trillion yuan ($1.17tr) in 2019, but the annual increase in this has slackened to just 3-4pc since 2012. The interesting thing is that since 2000-10, the M0 growth was in double digits. This means all the paper money already issued in circulation or deposits has not been affected. But the cash system needs to be reformed now, which will not disrupt the velocity of the money in circulation. On the contrary, M0 has grown at a very steady pace in the United States.

In conclusion, the e-RMB will start small, but can disrupt both traditional banking and the post-Bretton Woods system of floating exchange rates that the world has lived with since 1973. For China, blockchain and the e-RMB are a national strategic priority. We are entering a new era — an era of BharatCoin (India), fedcoin (United States), e-krona (Sweden) and many others will form the basis of a truly new digital financial system in which the e-RMB will set the base for China to be the new superpower of the 22nd century.

The writer is a money-market trader.

Published in Dawn, The Business and Finance Weekly, May 11th , 2020