China accelerates the digitization of RMB

published on 1 December 2020 | reading time approx. 1 minute

Recently, China officially launched a pilot project to digitize the Chinese yuan (RMB) in some cities. Digital RMB (DCEP, Digital Currency Electronic Payment) has the same legal effect as banknotes. It is issued by the People's Bank of China with state credit endorsement, and applies blockchain technology.

At present, citizens in the pilot districts, such as Shenzhen, can obtain and store DCEP with official e-wallets and use it at over 3,400 selected and licensed merchants. In order to obtain the new payment method and the corresponding digital currency, China raffled around 50,000 so-called hóng bāo (red envelope) with a unit value of 200 RMB, the equivalent of around 25 €. In addition, the winners of the Hong Bao had the opportunity to deposit additional money into their e-wallets, which many of the participants made use of.

   
Hong Bao have a long tradition in China and are given away to relatives and friends, especially for the Chinese New Year. The previously physical red envelopes have already been almost completely replaced by virtual versions in recent years. In 2019, around 800 million people sent virtual Hong Bao via tech giant Tencent and its app WeChat alone.

  
Compared to traditional banknotes, the most significant advantages of DCEP are its traceability, anti-falsification, and directional circulation. These advantages make it uniquely well suited for fiscal policy implementation, financial and tax regulation, as well as cross-border trade. For example, when the government provides subsidies with DCEP, it can easily monitor the actual flow of the subsidies to ensure accurate delivery and ex-post supervision; as for money laundering, corruption, and tax evasion, if DCEP is used as the settlement method, the flow of money can be accurately tracked, thus effectively inhibiting illegal and criminal acts.
  
In terms of companies, the introduction of DCEP very likely means stricter supervision, but it can also bring convenience for business. With the implementation of DCEP, tax evasion by cash payment will not be feasible in the future. At the same time, due to the characteristics of DCEP, discrepancies between cash flow and accounting records will be easily detected, and the scope for enterprises to manage financial statements will be reduced; no matter enterprises pay their own taxes or fulfill their withholding obligations, the compliance requirements for tax compliance will be higher. However, the use of DCEP helps to save time on accounting procedure, enhance the efficiency of cross-border trade and improve internal risk management.
  
Of course, DCEP is still in the pilot phase and the scope of the pilot is limited to daily personal consumption. It is unclear whether and how it will be applied to B2B business scenarios. There is also uncertainty as to how China's current administrative systems, such as financial system, tax reporting system, foreign exchange control, etc., will be integrated with DCEP. However, it is foreseeable that the implementation of DCEP is an irresistible trend and will have far-reaching effects. Enterprises are suggested to pay attention to the policy changes in time and make prompt response.