China is accelerating the internationalization of its digital yuan, expediting the reorganization of the global currency order. This analysis suggests that the policy direction aims to enhance the control over the dominance of the dollar while responding to the spread of digital currencies, such as stablecoins, which are cryptocurrencies pegged to existing currencies.
The People's Bank of China officially announced the establishment of an international operational center for the digital yuan at the Lujiazui Forum held in Shanghai on the 18th. Along with this, it announced eight financial policies, including the enhancement of free trade account functions and pilot projects for digital trade and payment service reforms within the Shanghai Lingang Free Trade Zone.
The policies announced the previous day are interpreted as an intention to simultaneously raise the usability and international status of the digital yuan. With the dollar exerting formidable influence even in digital currencies, the aim is to undermine dollar supremacy and strengthen sovereignty over its own currency.
◇ “The dollar's influence is formidable, even in digital currencies”
According to China Economic Media on the 19th, Zhou Xiaochuan, former governor of the People's Bank of China, warned in a speech the previous day that dollar-denominated stablecoins are spreading. He analyzed, “Various dollar-denominated stablecoins have already emerged in the market,” and added, “The role of dollar-denominated stablecoins can manifest in enhancing transaction efficiency and activating transactions of digital assets and other assets.”
Zhou, the former governor, also warned that the spreading of dollar-denominated stablecoins would accelerate the 'dollarization' of the digital economy, leading to adverse effects. He stated, “In some regions, the development of stablecoins based on local currency is being considered, but it remains uncertain whether stablecoins based on currencies other than the dollar can exert international influence,” and added, “Currently, certain countries in Latin America are experiencing a degree of dollarization, which can lead to various side effects. In most cases, dollarization may not be the best choice.”
Earlier, on the 17th (local time), the 'GENIUS Act,' which effectively recognizes stablecoins as financial instruments, passed through the Senate, and the process of enacting the law is underway. This is the first law to regulate stablecoins issued and circulated in the United States at the federal level, requiring issuers to hold 100% of reserves corresponding to the issuance in cash, government bonds, and other highly liquid assets. The reserves must be disclosed monthly and subjected to external audits. User protection measures regarding issuer insolvency, redemptions, and advertisements are also included in the bill.
Given that the majority of reserves for stablecoins traded within the U.S. system are U.S. government bonds, the expansion of stablecoin supply is expected to promote the demand for U.S. government bonds, ultimately strengthening the digital dominance of the dollar.
◇ Countering dollar supremacy… China is strengthening 'digital yuan'
In response, China is actively strengthening its digital currency, the 'digital yuan.' The digital yuan is directly issued by the central bank, allowing for traceability and control, which can enhance the efficiency of monetary policy and financial oversight. Payments and remittances can be made via QR codes in electronic wallets, eliminating the need to rely on mobile payment platforms. It is already being used for trade payments in certain Belt and Road Initiative countries and in Hong Kong, and its expansion in the future could contribute to the internationalization of the yuan.
The ultimate goal of strengthening the digital yuan is to elevate the yuan from a 'trade settlement currency' to a 'reserve currency.' Trade settlement currency refers to the currency used for transactions in the private sector, while reserve currency denotes the currency held by central banks in foreign exchange reserves. While trade settlement currency emphasizes ease of transaction, reserve currency is focused on trustworthiness, stability, and liquidity. The yuan ranks second after the dollar as a trade settlement currency, but its standing as a reserve currency is weak. As of the end of 2024, the yuan's share in the International Monetary Fund (IMF) foreign exchange reserves is only 2.18%.
Pan Gongsheng, governor of the People's Bank, emphasized the role of the yuan as a 'global public good' in a keynote speech at the Lujiazui Forum the previous day, stating that the dollar-centered currency order must be dismantled. He noted, “The international monetary system is changing to a structure where multiple sovereign currencies coexist and check each other,” and warned that if a specific country's currency dominates the international monetary system, the economic problems of that country could be transferred globally, and there is a risk that currency could be weaponized amid political and diplomatic conflicts, as we've already seen in practice.