Digital Yuan Could Cut Back Chinese Banks’ Role, Payment Providers’ Market Share

Contrary to the widely-held view, a new Bloomberg Intelligence analysis has suggested that the digital yuan (e-yuan) could threaten Chinese banks, Alipay and WeChat Pay greatly. The threat would stem from the People Bank of China’s (PBoC) embrace of the option to expand the e-yuan’s application beyond the monetary base (M0) stage in which it will initially be issued, the study adds. It posits a scenario where the e-yuan moves to M1 and M2 (the deposit-lending functions of commercial banks) after its base users reach a critical mass like a billion. 

The digital currency’s release could see the role of banks – some of which have been working with the PBoC in the pilot stage of the e-yuan – diminish in the economy as a result, the analysis also points out, while the market share of China’s two main mobile payment service providers gets cut down. 

Set to be rolled out fully by February 2022 during the Beijing Winter Olympics, the e-yuan would be the first central bank digital currency (CBDC) by a major economy. A survey by the Bank for International Settlements shows that almost 90% of 65 central banks surveyed have carried out researches on digital currencies. Since most of them are not at the rollout stage yet, there are indications that the e-yuan is likely to be a precursor that many other countries working on their version of a CBDC would give their utmost attention especially for its projected wide-reaching global effect which could cut across borders.

There have been reports that yuan’s reach has been gaining more ground of late. The latest figures from the General Administration of Customs shows that China’s yuan-dominated imports and exports surged by 22% year on year to CNY35.39 trillion (USD5.55 trillion) between January and November 2021. Its trade value grew with the top three partners — the Association of Southeast Asian Nations (20.6%), the European Union (20%) and the United States (21.1%) over the period.

It is not certain that the growth would reflect on the digital version of the yuan which, as at November, has had 1.55 million merchants accredited to accept the e-yuan for payments while over ten million corporate wallets have been set up on top of 140 million personal accounts. Nonetheless, as a retail CBDC that’s issued to the public for daily transactions, the issuance of the e-yuan is expected to fully meet the public’s daily payment needs, further improve the efficiency of the retail payment system and reduce attendant cost.

It’ll serve the purpose the PBoC cited in its July 2021 progress report on the e-yuan in which it claims that the already-changing “functions of cash and the environment of using cash” is one of the factors behind its research into a CBDC. The apex banks says it found in a 2019 survey that the number and value of transactions via mobile payment have grown (66% and 59% of the total) as against those paid in cash (23% and 16%) and those paid by card (7% and 23%).

If the scenarios proposed in the Bloomberg Intelligence study play out, it would mean a new direction from the initial view that the e-yuan would not have any significant impact on domestic institutions like banks and private mobile payment service providers like Alipay and WeChat Pay – both of which had a combined over 90% control of China’s mobile wallets at some point. It could erode Chinese banks’ return on equity (measure of profit) in the long term and the zero merchants fees or service charges the e-yuan offers could help its push to surpass Alipay and WeChat Pay even as the digital currency’s share could reach 19.9%, the analysis states.