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Digital Yuan: China's Digital Currency

Updated: Oct. 06, 2022By: Kent Thune

The digital Yuan is China's electronic currency. Also known as e-CNY or e-RMB or e-yuan, this currency stands in direct competition with cryptocurrencies, corporate payment systems, and mobile payment apps. Learn more about what it is and how it works.

E-RMB gold coin, Chinese digital yuan, conceptual image of the digital version of the yuan. Chinese decentralized currency, on board and circuits
RHJ/iStock via Getty Images

What Is China's Cryptocurrency 'Digital Yuan'?

The digital yuan is a form of central bank digital currency, which is issued by the People's Bank of China (PBOC). China's digital currency is a means for China to digitize its banknotes and coins for cashless payments. Thus, digital yuan is a digitized version of the physical yuan.

It's important to understand the subtle distinction between the Chinese yuan vs. renminbi.

  • Renminbi: the official currency of China
  • Yuan: a basic unit of the renminbi; commonly used as a general term referring to China's currency in accounting for the country's economic system

How the Digital Yuan Works

The digital yuan works as a digitized version of the physical yuan. Thus, China's digital currency works the same as banknotes and coins, albeit in a digitized form. This means that the digital yuan may eventually replace physical cash as a means of payment.

The People's Bank of China (PBOC) distributes digital yuan to banks in China, which are required to deposit an equal amount in reserves with the PBOC as the digital yuan they distribute to users or customers. Users can then store their digital yuan in digital wallets and use a QR code to make purchases with the digital currency.

The Digital Yuan vs. Cryptocurrency

Unlike cryptocurrencies, such as Bitcoin (BTC-USD), the digital Yuan is not an alternative currency, transactions are not completely anonymous, and it is intended to be used as legal tender in China. As such, digital currency in China will directly compete with businesses that rely on mobile payment systems.

Important: Significant differences exist between cryptocurrencies and the China digital currency. A cryptocurrency is a decentralized currency, meaning it is not issued by a central bank or backed by a federal government; whereas digital yuan is issued by the PBOC, China's central bank. Also, cryptocurrency enables anonymous transactions, whereas the China digital currency does not provide complete anonymity.

Digital Yuan Trial and Adoption

China's digital currency went into an early trial phase in 2020. Expanded pilot programs occurred during 2021, extending through 2022. Depending upon the success of the pilot programs, and the time it takes to work through any possible bugs in the system, the digital yuan is expected to be adopted in 2023 or 2024.

Conducted by the People's Bank of China, trials for the digital currency began in multiple cities in China, including Xiong'an, Shenzhen, Suzhou, and Chengdu. Pilot program expansions were planned for several other significant cities, such as Beijing, Tianjin, the Hebei Province, Hong Kong, and Macau.

Pros and Cons of the Digital Yuan

Pros of e-CNY

  • Consumer efficiencies: Rather than using multiple apps for various uses, such as transportation and multiple commercial transactions, consumers can use one digital currency.

  • Consumer savings: A digital yuan could potentially reduce or eliminate fee-based transactions for consumers, such as wiring and commercial apps.

  • Quality data collection: By digitally tracking transactions, the PBOC can more effectively collect economic data and compute statistics.

  • Crime detection and prevention: The ability to monitor transactions can help to prevent counterfeiting or the illegal flow of funds, such as terrorist financing or money laundering.

Cons of e-CNY

  • Lack of anonymity: Unlike the more popular forms of digital currency, the exchange of China's digital currency will not be anonymous, as the central bank and government of China will be able to monitor transactions.

  • Increased competition: While this can be an advantage for the Chinese government, the competition in mobile payments may threaten businesses, such as Alibaba (BABA) and Tencent (OTCPK:TCEHY), that receive revenue from their digital payment services.

How To Invest In the Digital Yuan

The digital yuan is not available to non-Chinese citizens and investors are not able to directly buy or trade its digital currency. Since the digital yuan is simply a digitized version of the physical yuan, there are indirect ways for investors to invest in the China digital currency.

For example, to invest in the physical yuan, investors may purchase yuan directly and hold it in cash, buy yuan futures (read about stock futures here) or yuan forward contracts, or invest in exchange-traded funds (ETFs) that are designed to track the Chinese yuan.

Bottom Line

China's digital yuan, also known as e-CNY or e-RMB, is a digitized version of the physical yuan. In simple terms, this digital currency is designed to be used in the place of legal notes and coins. The end goal of China's digital currency is to create a cashless system that can create consumer, commercial, and government efficiencies.

This article was written by

Kent Thune profile picture
Kent Thune, CFP®, is a fiduciary investment advisor specializing in tactical asset allocation and portfolio management with a focus on ETFs and sector investing. Mr. Thune has 25 years of wealth management experience and has navigated clients through four bear markets and some of the most challenging economic environments in history. As a writer, Kent's articles have been seen on multiple investing and finance websites, including Seeking Alpha, Kiplinger, MarketWatch, The Motley Fool, Yahoo Finance, and The Balance. Mr. Thune's registered investment advisory firm is headquartered in Hilton Head Island, SC where he serves clients all around the United States. When not writing or advising clients, Kent spends time with his wife and two sons, plays guitar, or works on his philosophy book that he plans to publish in 2024.

Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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Comments (1)

Any thoughts on China using its e-RMB to pay/reimburse all its citizens losses in all the real estate development companies they prepaid for apartments/housing that will never get built?
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