December 04, 2024
By Our Correspondent
Since its ambitious launch in 2019, China’s digital yuan has encountered significant obstacles. The absence of a substantial price incentive, coupled with fierce competition from established mobile payment leaders Alipay and WeChat Pay, has hindered the state-supported currency’s acceptance. The challenges in adoption are further complicated by the Chinese government’s approach to the digital yuan initiative.
Just two days prior to its introduction, the South China Morning Post reported insights from Charles Chang, director of the Fintech Research Centre at Fudan University, who highlighted the difficulties in transitioning consumers from existing payment methods to the state currency. Chang noted that Alipay and WeChat Pay hold a near-monopoly in the market, making it challenging for the digital yuan to gain traction among users. Despite these hurdles, the People’s Bank of China (PBOC) remains committed to advancing the digital yuan initiative. Currently, pilot projects are underway in 26 regions across 17 provinces. The cautious pace of adoption reflects the government’s uncertainty regarding the project’s potential impact.
The digital payments landscape in China is predominantly controlled by Alipay, operated by Ant Group, and WeChat Pay, managed by Tencent. Together, these platforms account for the majority of transactions in the country. Nevertheless, over 180 licensed non-bank payment institutions also operate within the market. As of July 2024, the digital yuan has recorded a total transaction value of 7.3 trillion yuan, approximately 1 trillion yuan. While this figure shows improvement, experts remain skeptical about its ability to significantly disrupt the established players.
Chen Zhiwu, a chair professor of finance at the University of Hong Kong, stated that the inherent characteristics of the digital yuan outweigh those of various other payment methods.
Nevertheless, the global appeal of the Chinese yuan is constrained by practical realities, and the digital yuan is inherently tied to this limitation. The People’s Bank of China (PBOC) has been actively advocating for the digital yuan as it seeks to advance its position in the global Central Bank Digital Currency (CBDC) competition.
The launch of the digital yuan is likely to be overshadowed by allegations of corruption against former PBOC official Yao Qian, which are central to China’s financial innovation agenda. However, the challenges extend further; potential users may hesitate to adopt the currency due to concerns regarding privacy and usability.
To enhance adoption, China has introduced a new feature: a physical CBDC card equipped with dynamic QR codes and offline payment capabilities, among other functionalities. This card operates similarly to conventional debit cards, enabling users to make payments by tapping or scanning, with the latter being a relatively new service still in its early stages. This physical solution makes the digital yuan more accessible to the general public.
Despite these advancements, significant issues within the global digital currency landscape have hindered the adoption of the digital yuan. A recent report indicated that China ranks among the countries most involved in cryptocurrency scams, which could undermine public trust in cost-backed financial innovations, including the digital yuan. As China accelerates the development of its CBDC, it faces competition from emerging global digital currencies and established domestic payment systems.
The government’s ability to address these challenges will be crucial in determining how effectively it can meet user incentives, ensure data privacy, and enhance the overall competitiveness of the digital payments ecosystem. This will ultimately influence whether the digital yuan can achieve widespread acceptance and sustainability.
