Chinese Province Closest to Russia Plans e-CNY Pilot

Barely a month since the largest Russian lender Sberbank said it has started money transfer service to China through Alipay wallets, the Chinese province closest to Russia announces it is developing a platform economy that could see extended piloting of the digital yuan (e-CNY) in Heilongjiang. 

The Heilongjiang province says its move is to have “a new engine to accelerate the digital transformation of the economy and society.” It wants to build a provincial-level financial service platform that will establish a financial theme database and provide various financial institutions in its territory with the support to carry out business and service innovation based on new technologies. 

It also wants to “actively promote the pilot application of digital RMB in Heilongjiang Province, and explore the construction of digital RMB pilot projects and the expansion of scenarios,” the newly-released approval by the leaders of the Provincial Party Committee shows. It adds that they will accelerate the extension of digital financial services to border areas and rural areas, and improve the level of digital financial inclusion.

e-CNY for cross border transactions 

The use of the e-CNY for cross border transactions remains a topical issue even as the yuan’s use for payment has risen to a 3.2% market share according to recent data from SWIFT. The wider use of the digital version across borders could boost yuan’s internationalization which has been debated to likely have an impact on the US dollar’s dominance. 

The US has not confirmed plans to issue a CBDC but a recent Federal Reserve report points to their working on Project Hamilton, as a hypothetical general-purpose CBDC capable of handling 1.7 million transactions per second. Meanwhile, the Fed’s Lael Brainard sees the trialling of e-CNY across major Chinese cities over the past two years as a cross border concern to the US. 

In her speech last week at the 2022 U.S. Monetary Policy Forum, Governor Brainard said the “substantial early progress on the digital yuan may have implications for the evolution of cross-border payments and payment systems. And it may influence the development of norms and standards for cross-border digital financial transactions.”

Adding the e-CNY pilot plan to Heilongjiang’s existing connectedness to Russia strengthens the argument for a cross border arrangement. Heilongjiang has a pilot free trade zone in which trade with Russia doubled, both import and export, towards the end of 2021. The first road bridge connecting China and Russia was completed last December to help boost bilateral trade once launched. Also. China and Russia have been working on a proposed independent trade network that could see both countries share a common objective to rely less on the U.S.-led international financial system, SWIFT, for trades. 

The developing China-Russia angle to e-CNY cross border use has antecedents: the multiple CBDC project and the e-CNY being connected with Hong Kong’s Faster Payment System for easier payment. It is coming after several factors reportedly hindered the e-CNY’s successful introduction to foreigners at the 2022 Winter Olympics in Beijing. This is despite an encouraging number of transactions over Visa’s and the ease of converting foreign currencies into e-CNY that is spendable through a hardware wallet, according to the Wall Street Journal. 

They include many athletes or foreigners not recognising the CBDC as an official currency of payment as well as the privacy concerns raised by its use. Some local vendors are also reported to continue using the familiar mobile payment platforms like Alipay.