Why Beijing Wants a Digital Yuan
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In his 2011 book On Russia, former US secretary of state Henry Kissinger used the ancient Chinese game of Weiqi, or Go, as it is also commonly known, as an extended metaphor to conceptualize and explain the decisions of the Chinese regime in both foreign and domestic policy. A game of strategic domination akin to chess, Go is won by building and maintaining key positions around the board, rather than by any strategy of outright attrition. Understood as one of the stones placed upon the board, the digital yuan joins the Belt and Road Initiative (BRI), the Regional Comprehensive Economic Partnership (RCEP), and militarization of the South China Sea as part of a strategy for squeezing US positions both internationally and domestically.
In the struggle to dominate the multidimensional board of geostrategy, space, cyberspace, air, land, and sea, the digital yuan poses a new and unique challenge to the US regime. Though there has long been speculation, even serious discussion, of the dollar being replaced or eventually displaced as the world reserve currency, it has remained the overwhelming currency of choice, due in part to institutional inertia but also because of the continued relative economic predominance maintained by the US. As Tim Morrison pointed out in Foreign Policy a little over a year ago, this “exorbitant privilege” entails many advantages for Washington. Chief among them is the US's ability to cheaply and immediately finance its own deficit spending, as well as disproportionate power in imposing economic sanctions.
Though the most recent burst of covid-19-related spending in the US has rekindled talk of the demise of the dollar, over 80 percent of all international settlement transactions continue to be conducted in dollars. As to how the full-scale launch of the digital yuan (DC/EP) may undermine this standing, it provides the Chinese regime two immediate advantages. The first is that in the age of ubiquitous mobile-phone service and devices, millions of rural Chinese will gain access to banking services previously unavailable, upping demand and circulation of the yuan and enhancing the integration of rural Chinese into the larger Chinese economy. Second, unlike cryptocurrencies like bitcoin, the digital yuan is controlled by the Chinese regime and will allow it a clear, real-time picture of the Chinese economy, providing greater ease for the regime to centrally manage and plan its fiscal and monetary policies. Combined with their investments and involvement in Africa and Central Asia via the BRI, it is not difficult to imagine such immediate access to China's legal tender. This is key, as no other digital currency is yet so recognized by any state, potentially sending demand for digital yuan soaring across Central Asia and Africa and increasing its use in settling international transactions.
Though it had reigned uncontested for a century, it took comparatively little time for the British pound to lose its place as the global reserve currency. In the age of acceleration, the dollar’s fall could be even more abrupt and the fall more precipitous. The Global Financial Crisis signaled the end of an economic order. The next iteration of that order has yet to be determined. Were the dollar ever unseated, it would drastically alter the ability of the US to maintain its present deficits, which show no sign of abating, and which are the foundation of the US fiscal-military state.
Though arguably still preponderant, Washington's relative economic and geopolitical power continues to decline compared to that of Beijing. The digital yuan is likely to continue this trend. Digitizing the dollar, as Morrison suggested in his Foreign Policy article, is an obvious and necessary countermove—from the US regime's perspective—to the arrival of the digital yuan.1 The Trump administration did nothing to that effect, however, and the Biden administration has articulated no clear vision of the future of cryptocurrency or a digital dollar in the US besides vague indications of coming regulations. There's certainly nothing so sweeping as the digitization of the dollar. For now, this limits Washington's ability to compete with Beijing in terms of seizing the benefits of a regime-approved digital currency.
- 1. Apart from the threat such a situation poses to the position of the dollar internationally, Beijing's launch of the digital yuan also throws further into question the future of bitcoin and other existing cryptocurrencies. The majority of bitcoin mining is done in China. As such major existing cryptocurrencies, themselves opaque to external surveillance and unable to be controlled by the Chinese regime, now compete directly with the digital yuan, there exists the threat that China may abruptly follow India in considering banning all other cryptocurrencies. It has, after all, done so in the past and has hinted it may do so again. As corporations and institutional investors in the United States and Europe have, in the past year, begun taking substantial stakes in some of these cryptocurrencies, like bitcoin and ether, a sudden shock brought about by Beijing fiat banning those currencies in China could trigger unknown volatility and risk to US and global financial markets as these institutions hemorrhage untold billions.