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e-CNY: slow burn to rapid acceleration?

27 Jul 2021

Jennifer James, Emerging Market Credit Portfolio Manager, explores how the People’s Bank of China’s digital currency has been several years in the making but has the potential to rapidly reshape the payments industry.

Key takeaways

  • China is uniquely positioned to be the first major economy with a central bank digital currency.
  • Among the potential advantages are reduced payments transaction costs, greater competition in payments, greater financial inclusion, “managed anonymity”, targeted transmission of policy and potential geopolitical influence.
  • Drawbacks are mostly associated with users potentially enabling greater state control and platforms struggling to provide personalised services if users exercise anonymity controls.


The People’s Bank of China cannot be accused of hurrying the Digital Currency, Electronic Payment (DCEP) project, the acronym for its central bank digital currency, which is likely be known by the market as e-CNY when it officially launches.

The project has been seven years in the making, with a research group first formed back in 2014. Expectations are that an official launch could coincide with the February 2022 Winter Olympics in Beijing – which would offer a useful marketing ploy to showcase China’s technological prowess. The PBOC is targeting broad coverage of China’s population, which could reshape the payments industry over the coming years.

To China’s credit, the PBOC is well ahead of most western central banks. Many of these are only at the preliminary stages, whereas China has already field tested its digital currency within major cities. Each of the test cities served a different purpose: for example, Beijing tested conversion of the digital currency into cash and vice versa; Shenzhen’s younger consumer market tested the rigour of small ticket high frequency transactions and the city was also used to test cross-border usage with Hong Kong residents; and Suzhou tested near field communication (NFC) payments and offline transactions.

The PBOC has actively involved a number of large financial institutions in its early rollout. The six major state-owned banks (Agricultural Bank of China, Bank of China, Bank of Communications, China Construction Bank, Industrial and Commercial Bank of China, and Postal Savings Bank of China), together with the two largest internet banks (WeBank, backed by Tencent, and MY-Bank, supported by Alibaba’s Ant Group) are involved. This appears deliberate. First, a small number of large distributors gives it both control and confidence that the distributors can scale up operations and, second, that data remains secure. These players will be classed as Tier 2 institutions, through which the public can open e-CNY accounts/wallets. These Tier 2 institutions can disseminate e-CNY issued by the People’s Bank of China, which represents Tier 1 at the top of the pyramid. Other banks and payment service providers will be classed as Tier 2.5 institutions, able to provide services to e-CNY users.

The e-CNY will coexist with Alipay and WeChat Pay (the two largest payment providers, respectively part of Alibaba and Tencent), which currently dominate China’s payment system with a near duopoly. The expectation is that the e-CNY will generate competition. Alipay and WeChat Pay will essentially have to give up their competitive moats on merchants and individual data but the parent companies are expected to get to preserve their expertise in technology and gain access to government-related business opportunities.

The driving force

So what is the purpose of e-CNY? There are several advantages for users and the state, which we will build on later but the principal strategic goals are facilitating the ongoing move towards a digital economy, enhancing financial inclusion, improving efficiency, strengthening control and supervision of the financial system and ensuring the renminbi remains the dominant currency in China, fending off threats from private currencies such as Bitcoin or overseas digital currencies. Also, its use in cross-border payments and internationalisation of the renminbi would allow China to lessen its reliance on the US dollar-based system.

Technology and privacy

Officials have been vague around the technology used, although it is understood to be centralised account-based rather than blockchain, with transactions (notably large ones) expected to be traceable (data is everything in the modern economy). The PBOC has described this as “managed anonymity” following the principle of “anonymity for small value and traceable for high value” transactions. Users of e-CNY will be able to set up wallets and transact in small amounts with just a phone number, with higher limits requiring more personal information. Anonymous sub-wallets with the holder’s main digital wallet will allow users to transact without revealing private information to counterparties and payments companies. Meanwhile the tier system means that while the PBOC keeps a record of all e-CNY transactions, others hold the personal information of the e-CNY holder. Law enforcement agencies will have the power to match transactions with personal information if illegal activity is detected.

Currency not crypto

A key question that often comes up is what is the difference between a central bank digital currency (CBDC) and a cryptocurrency or money transferred between banks? The key difference is that the CBDC is comparable to physical notes/coins and will be classified as such (M0 in central bank money terminology). It is directly backed by the central bank, so it is a direct claim on the central bank as opposed to a liability of a financial institution, so it is essentially riskless. Unlike a cryptocurrency it is denominated in units of the national currency so has no more volatility than the national currency, unlike cryptocurrencies that are often driven by speculation.

What are the potential advantages?

e-CNY offers many advantages to different stakeholders, although it is worth pointing out that what is an advantage to one stakeholder may be a disadvantage to another and vice versa. Efficiency and financial inclusion are potentially the least controversial reasons. They are a key motivator for developing and emerging market economies where transaction costs and a large underbanked population remain concerns as illustrated in the chart below from a survey undertaken by the Bank for International Settlements.

Motivations for issuing a retail CBDC
1= Not so important 2 = Somewhat important 3 = Important 4 = Very important

Source: BIS central bank survey on CBDCs, BIS Working paper 114, January 2021

We can group the advantages into three key areas.

  • Financial inclusion – ability to reach the underbanked among poorer and rural communities and bridge the ‘digital divide’ for those who do not have smartphones.
  • Offline – potential to operate offline through near field communication via CBDC cards.
  • “Managed anonymity” offers greater privacy and data protection for small transactions.
  • Combats crime through the potential to trace transactions and could help draw grey/black market activities into taxable economy, benefiting the tax take.
  • Tax visibility – potential to rely more on traceable Value Added Tax (VAT) rather than income taxes.
  • Geopolitical ambitions – lessens reliance on USD-dominated international finance while adoption of e-CNY is likely to deepen China’s sphere of influence.
  • Legal tender – e-CNY will be legal tender so must be accepted by merchants and retailers with digital systems in place.
  • Liquidity – since e-CNY is directly backed by the central bank it offers greater payments confidence during crises when there might be rising counterparty risk.
  • Competition and lower cost – Currently merchants pay transaction fees of 40-60 basis points. With the PBOC not imposing fees on e-CNY transactions, the expectation is that fees on e-CNY will be considerably lower even accounting for institutions’ distribution costs.
  • Targeted transmission of accommodative/tighter policy.
  • Easier monitoring of flow of money in the economy.
  • Potentially easier to implement negative interest rates.
  • Easier to make transfer payments, implement universal basic incomes etc.

What are the potential drawbacks?

Drawbacks primarily involve state control and possible damage to incumbents from disintermediation, although there is also a potential liquidity issue from this.

  • PBOC has access to private individual transactions data.
  • Potential for central bank to put expiration date on the digital currency or more easily confiscate funds or to disallow certain transactions.
  • Digital currency could lead to more of the banking payment system being in direct government control, leading to withdrawal of non-government operators. Smaller fintech/payment companies may be disadvantaged relative to the main participants.
  • e-CNY as a store of value might compete with banks and money market funds, curtailing cheap deposits and exacerbate funding strains. This is unlikely in the short term, however, as the PBOC has said it will not pay interest on e-CNY given its classification as M0.
  • “Managed anonymity” could lead to payment platforms and online companies gathering less data on customers, reducing their ability to provide personalised services.

Making friends and influencing people

Taken together, central bank digital currencies offer a means of improving efficiency in the payments system. Anything that reduces transaction costs should be seen as freeing up money to boost economic growth in more productive areas of the economy. Consumers are likely to view this as an efficient means of conducting transactions. Competition from central bank digital currencies is also likely to drive down fees across payment systems.

The caveat to this is that users are trading lower cost for potentially more state surveillance. With China’s reputation for political control this might seem uncomfortable. But think about it. Western consumers readily relinquish their privacy, shopping habits and personal data to digital companies if it means they get free access to content, apps and social media tools.

e-CNY may further China’s domestic interests. Whether it alters any foreign relationships is a moot point. It may help to foster an e-CNY digital currency area with several Asian and African countries readily using it, but countries that are more likely to favour the US dollar because of cultural or trade links are unlikely to switch.

Quick adoption

As a mixed capitalist/command economy, China is in a particularly strong position to promote adoption of e-CNY. It could issue banknotes and e-CNY in parallel so that the banking system is forced to use it. If a worker receives a part of their salary or transportation subsidy in e-CNY then the only way they get to spend it is to begin transacting in it. As an incentive, participants in some trials were able to access special discounts if they transacted in e-CNY.

The PBOC has already worked with UnionPay to release a nationwide smart point of sale (POS) standard, paving the way for e-CNY, so merchants should not need new technology. Consumers meanwhile should be able to use e-wallets linked to an e-CNY account. The PBOC is also expected to launch an app that will allow consumers to aggregate their different accounts.

The official launch date for e-CNY is yet to be confirmed but the central bank digital currency forms part of the latest 5-year national plan. Given China’s reputation for rapid progress and capacity to deliver national goals on time, we can probably expect massive uptake in the coming years.

These are the views of the author at the time of publication and may differ from the views of other individuals/teams at Janus Henderson Investors. References made to individual securities do not constitute a recommendation to buy, sell or hold any security, investment strategy or market sector, and should not be assumed to be profitable. Janus Henderson Investors, its affiliated advisor, or its employees, may have a position in the securities mentioned.


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