2 reasons China may be ramping up its digital currency project
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China’s digital currency project reached a new milestone in April when the People’s Bank of China (PBOC) launched the first trials of the digital RMB in four Chinese cities—Shenzhen, Suzhou, Chengdu, and the Xiong’an New Area near Beijing. Chinese media reported that digital RMB would be used for transportation subsidies in Suzhou and primarily focus on food and retail services in Xiong’an.
The timing of the rollout was curious, coming as China recovered from the coronavirus that largely crippled its economy. Why would Beijing make the push then?
Jennifer Zhu Scott, founder of investment firm Radian Partners, cited two reasons in an interview with Fortune this week.
First, the Chinese government sees poverty alleviation as a top priority for 2020. Currently, there are 5.5 million Chinese people living in extreme rural poverty. A digital currency would streamline the distribution of aid to rural regions, eliminating some of the bureaucracy and inefficiencies that currently make the process cumbersome.
“In theory, all the central government needs to do is to give every single family a phone [with] a built-in digital wallet in it,” said Zhu Scott.
The second reason for the apparent digital currency push is China’s urgent need to depend less on the U.S. dollar.
“China has been expanding its global role, especially in developing countries,” said Zhu Scott. But its bilateral trade still relies on U.S. dollars, she said. That’s a risk for Beijing, considering recent U.S. threats to impose sanctions on China; such moves effectively weaponize the U.S. dollar.
Just this week, the U.S. Senate unanimously passed a bill that would sanction Chinese officials—as well as banks and firms that do business with them—who “undermine Hong Kong’s autonomy or erode the basic freedoms promised to Hong Kongers,” Sen. Pat Toomey (R-Pa.), a bill sponsor, said in a statement. Lawmakers drafted the bill in response to Beijing’s move to impose a controversial national security law on Hong Kong. The U.S. argues that by enacting the law, Beijing is stripping Hong Kong of its promised autonomy from the mainland.
Given such threats, “a sensible question to ask is, ‘How much am I exposing my trade [to] this political risk, when this bilateral trade doesn’t involve the U.S.?’” Zhu Scott said.
Beijing has kept the initiative largely under wraps. There is currently no official date for when China will launch its digital currency. However, Yi Gang, governor of the People’s Bank of China, told the media in May that the PBOC will be planning another trial during the 2022 Winter Olympics in Beijing.
This story is part of Eastworld Spotlight, a series of conversations on matters of business, tech, and finance with executives, experts, entrepreneurs, and investors in Asia. Subscribe to Fortune’s Eastworld newsletter to get them in your inbox.