Digital Yuan Aims for USD, Needs to Win AliPay and WeChatPay First

There have been talks of China’s digital yuan or digital currency electronic payment (DCEP) project aiming to challenge the US dollar dominance on the world stage but a senior fellow at the Peterson Institute for International Economics has said that the digital currency would have to contend and succeed in humbling AliPay and WeChatPay first before facing the US dollar. 

Martin Chorzempa notes in a CNBC interview that the digital yuan has to beat the two e-payment giants in China which currently process about 95% of digital payments in the country before it ”can make a dent in the U.S. dollar”.

As seen with the case of Ant Financial and its stalled IPO, China is already asserting its power over the tech industry to some extent. However, if Chorzempa’s suggestion is anything to go by, it could mean more control could be coming AliPay and WeChatPay’s way in coming months. 

A separate but related report by the Financial Times shares that China is going to use the digital yuan to reassert state control over its fintech industry including using it to rival the cashless payments platforms of the two companies. 

It notes that the DCEP’s new payments system will threaten to undermine the market position of these two most popular and privately owned platforms since the digital yuan will be distributed directly to the e-wallets of users by state-owned banks thus running independently of Alipay and WeChatPay.

Zou Chuanwei, a digital currency specialist at Wanxiang Blockchain mentioned in the report said digital yuan’s growth in market share will come at the expense of WeChat Pay and Alipay even as their consumer lending business is hurt by the government’s tightened regulatory control. 

So far, several activities have been held in recent months to popularize the digital yuan use among citizens ahead of its likely public rollout for the 2022 Winter Olympics. They include pilot tests in major Chinese cities with the latest being in Beijing during the Spring Festival holiday which ended this week where red envelopes won by lottery were redeemed by winners and a biometric ‘hard wallet’ card was launched for the digital currency.

While its use is currently confined to domestic transactions in China, it’s been argued that the digital yuan will eventually be used for cross border payments owing to China’s vast network of working relationships with several countries including state members of ASEAN, the Regional Comprehensive Economic Partnership and the Belt and Road Initiative groups. 

The topic got a reawakening after the People’s Bank of China recently entered into a joint venture with financial service provider, SWIFT, a move some market insiders say is China’s effort to ensure the internationalization of the Chinese currency through its digital version. 

While it’s been argued that China could set the precedent for global cross-border transactions with a widely-used digital yuan that cuts down trade settlement time and eliminate third parties, among other things, an expert at a Berlin-based think-tank on China, Merics, Maximilian Kärnfelt said in the Financial Times report that the digital currency would not remove many of the problems holding the yuan back from being used more globally. 

“Much of China’s financial market is still not open to foreigners and property rights remain fragile,” he said.