Impact of Digital Renminbi
In an article in the opinion column of this daily, 13 May 2020, I discussed plans for the trial use of digital Chinese renminbi (RMB) or eRMB and a number of related issues
In an article in the opinion column of this daily, 13 May 2020, I discussed plans for the trial use of digital Chinese renminbi (RMB) or eRMB and a number of related issues.
Previously, I also discussed the issue of digital currency (digital currency or crypto currency) in the opinion column twice, namely "Shaking Bitcoin" (Kompas, 12/12/2017) and "Bitcoin Does Make a Wealth" (Kompas, 30/1/2018). This issue continues to roll and this time I want to continue my discussion.
The South China Morning Post (SCMP, 5/5/2020) published Shannon van Sant\'s opinion, which was similar to what I had expected that if eRMB was introduced, two types of RMB would be circulated temporarily, in the form of banknotes now and in digital form. According to the writer, for the time being, people are allowed to exchange their RMB, both in banknotes and in funds deposited in bank accounts, into eRMB. Thus other than that the value of eRMB is associated (pegged) with RMB banknotes, both become official money in the payment system in China. This exchange can also be done for all money owned by the public in their balance on WeChat, Alipay, and other payment application systems.
At the moment, in China, there are 600 million users of Alipay, which is owned and operated by Ant Financial. Beyond that there are still many other payment service platforms that are used by millions of people in the country. This means that it is clear that Chinese people are becoming increasingly accustomed to payment systems that use applications via their smartphones, or ways of payment without cash (cashless).
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I also have the experience at the NTU Singapore campus where I teach, especially around this past year. When I paid for food and drinks at the cafeteria every lunch, I often felt like a weird person because I paid for my food with paper money. Most students paid only by sticking their cellphones to the code scanner at the place of payment.
Likewise, when paying the cost of taking a taxi every day commuting with cash, I sometimes heard the driver ask in an annoyed tone, "Are you paying in cash?", which I usually answered curtly too, “And why not?”
I am aware of being an old person who is a "misfit" because of changes in the procedure for payment. Every now and then as a teacher of monetary economics I say, "This is a legal tender issued by your government, you know." Of course I lose because the times have changed, the use of banknotes has been replaced with digital, payment without paper money or cashless.
Impact of eRMB
That is a picture of the digital age which is clearly part of the new financial-economic life in societies everywhere. Let alone in China, which is at the forefront of this change. China holds the top record in terms of the large number of mobile phone usage worldwide. Therefore, Chinese people are increasingly accustomed to payments without cash, wireless payment, replacing payments through paper money.
My campus, NTU, has been campaigning for some time to do this so that paying for one bowl of noodles or a plate of chicken rice should use a cellphone that for ancient people like me it has not been used to.
The Chinese central bank, People Bank of China (PBOC), has carried out trials using the digital RMB or eRMB, also called the Central Bank Digital Currency (CBDC) in four cities; Shenzhen, Suzhou, Chengdu and Xiong\'an, satellite cities to the south of Beijing.
As money intended to replace RMB banknotes, eRMB is no different from RMB banknotes which are the official payment instruments in the community. Thus, eRMB is official money or fiat money, which is issued by PBOC, of course with a fiat or edict, legislation. However, as digital money, eRMB is created through a very complex computational algorithm process called blockchain.
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As digital money, eRMB has advantages in terms of security (against counterfeiting), and because of its transparency, the process of paying will not happen more than once. Thus, the various advantages of digital money that were mentioned by its creators when Bitcoin and the like were introduced, are also owned by eRMB. In addition, eRMB as the official money issued by PBOC is fiat money that is trusted by the public.
Since becoming known in the community in 2009, digital currency has become a challenge for monetary authorities as an institution authorized to issue fiat money. Central banks in the world do not have a uniform opinion, there are those who refuse or even forbid it, while others allow it to circulate in the community. Bank Indonesia, for example, in December 2017 did not recognize digital money as a means of payment and as a financial asset for trading.
Libra and official digital money
The challenge of digital money has increasingly been felt since Mark Zuckerberg, chairman and CEO of Facebook, announced in October 2019 that Facebook was developing plans to publish digital money called Libra. Facebook boss said, Libra will have a stable value, different from other digital money.
Why is that? Because, although not issued by a legitimate authority (central bank), Libra is supported by a number of financial institutions, such as Mastercard, Visa, and Paypal, which are members of the Libra Association. Libra also mentioned 50 percent is based on the United States dollar (US). Therefore, Libra will be a digital money whose value is stable.
One disadvantage of Bitcoin and the like is that its value is very volatile, unstable. This is considered to encourage speculative activities, in addition to their use of techniques that use letters password, people do not know the identity of the opponent\'s communication. It is feared that it would be easy to exploit acts that grazed the law; like illicit financing, even used to finance terrorism. According to Mark Zuckerberg, with Libra, people will be able to conduct fund transactions without having to have a bank account, as easy as sending an e-mail. This is definitely a challenge for monetary and supervisory authorities considering that currently there are around 1.7 billion Facebook users.
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Beyond the above, there are proposals for the issuance of official digital money. In the US there was a proposal from Republican Congressman French Hill, from Arkansas, along with Illinois Democratic Party member Bill Foster, who asked Federal Reserve Chairman Jerome Powell to create a digital US dollar. And in Europe, Mark Carney, while still serving as Governor of the Bank of England last year, also proposed the issuance of a digital currency by a number of central banks together.
Although these proposals have not yet come true, I think they have encouraged the crystallization of the Chinese Government\'s decision to issue eRMB. I see that the obvious competition is from the plan for the publication of Libra. China does not want to be left behind before the US dollar, which continues to dominate the world payment system, will be further strengthened by US-based Libra.
According to Shannon van Sant, PBOC since 2014 has conducted studies for the creation of RMB in digital. With various proposals that have sprung up for issuance of official digital money, or digital money with a stable value such as Libra, China may feel triggered to quickly issue eRMB. So, it was decided to test the use of eRMB in the four cities.
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Fate of US dollar
What is the fate of the US dollar in the world payment system with the issuance of eRMB? I think it depends on how market players evaluate this new money. The habit of market players making payments in trade and investment transactions using a type of currency in commodity price quotations -- for example oil and energy trading always in US dollars -- might be affected, although I don\'t think it will drastically.
I have noted earlier that China\'s desire for the renminbi to be accepted globally must have existed since China officially became a member of the World Trade Organization (WTO) in 2001. With its economic growth that has grown tremendously for decades through increased investment in the infrastructure sector and its international trade which continues increasing, China became the country with the second largest economy in the world, replacing Japan in 2010.
And in 2016, the yuan or renminbi was included in the ranks of the world\'s elite currencies based on the decision of the International Monetary Fund (IMF), which made the RMB the currency used to determine the value of the Special Drawing Right (SDR) with a scales of 10.92 percent, along with other strong currency. The biggest roles are the US dollar (41.73 percent), followed by the euro (30.93 percent), the yen (8.33 percent) and the pound (8.09 percent).
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In fact, in reality, whether the determination of the scales in the calculation of SDR for these big countries is in accordance with the role of their respective currencies in the world payment system, is also unclear. The use of SDR itself as a tool to save foreign exchange reserves is also no longer appropriate. The SDR was created by the IMF in 1969 in conditions of an uncertain global economy because the world monetary system which was in force at the time and the SDR were basically only a unit of account.
However, the position of a currency as part of the basis for calculating the value of the SDR clearly has its own meaning as an acknowledgment by the IMF that the country\'s economy with the currency has a calculated weight.
I have not been able to show clearly and exactly what the impact will be on the world financial and payment system with the issuance of eRMB. What is more certain is that China is certainly going to launch this eRMB digital money. When is the exact time, we don\'t know yet. However, if in the trial period there are no technical problems, I don\'t think it will take too long.
After it is officially used, eRMB will circulate along with RMB banknotes, both money that is legally valid as a legal tender, payment instrument or financial asset.
For how long will these two forms of money be circulated together? Maybe this will progress gradually. Later, eRMB will be used to replace RMB banknotes that are still in circulation. People can exchange their RMB, both in the form of banknotes, bank account balances, and balances in wallets on various digital payment platforms with eRMB. Of course it depends on how the community responds to the circulation of eRMB itself. If all of them replace all of this with eRMB, of course the process will run fast, especially if there is a need to do it.
The replacement process can also go through the usual in the central bank\'s money circulation policy. Paper money has a naturally circulating period, meaning that it is shabby. All central banks have the policy of replacing shabby money with new money, often referred to as a clean money policy. This is not an additional money supply, because the worn-out money is destroyed and replaced with a new one. Keep in mind, paper money will only become part of the money supply if the money is removed from the central bank\'s cash. So, money that accumulates in central bank warehouses or state money printing instead of circulating money, only becomes money in circulation after it exits the central bank\'s cash.
I see the development to introduce eRMB as an effort by China to increase its role as a big country which certainly has ambitions to play the role of a world leader, in accordance with its position as the second largest country after the US. This goes hand in hand with a large project through infrastructure development that is reminiscent of the heyday of China in the Han dynasty in the Silk Road by expanding through the sea and others in the Belt and Road Initiative (BRI) or in mastering information technology and communication (ICT) for the future.
However, in terms of the use of the renminbi as a means of payment in world trade and investment as is known to date the role of the US dollar is still the most dominant. According to Shannon van Sant\'s article above, the use of yuan or renminbi as a means of payment and storage of new reserves was 2 percent last year. Meanwhile the US dollar is used in 90 percent of world trade transactions and as much as 60 percent in the fertilization of foreign exchange reserves of countries in the world. Therefore, the road that must be traversed is still long.
J Soedradjad Djiwandono, Emeritus Professor of Economics, University of Indonesia.