Where do we stand with the E-CNY?: Tailwinds from the changing geopolitical landscape and consumption stimulus but headwinds from zero-Covid policy

After making its debut via pilot programs in several cities, the overall E-CNY transaction value more than doubled from RMB 34.5 billion in June 2021 to RMB 83 billion in May 2022 (Chart 1). Still, the role of E-CNY in China’s domestic digital payments remains tiny, accounting for less than 0.1% the total non-bank digital payments which are dominated by Alipay and Wechat Pay (See Table 1 for a comparison between E-CNY and Alipay / Wechat Pay). Beyond that, the growth of transaction value is significantly behind that of user growth, with the number of individual and corporate users up by 10 times and 3 times, respectively, within the same period (Chart 2). This points to the concerns about the sustainable use of E-CNY once promotions and /or subsidies are over. Furthermore, the cross-border trial with foreign visitors was launched during the Winter Olympics, but this launch has suffered from the extremely low level of visitors to China as the border has remained virtually closed due to the pandemic.

Looking ahead, we believe there are tailwinds regarding the use of the E-CNY but also some headwinds. On the former, we observe two tailwinds for the wider use of E-CNY in the near term. Firstly, the financial sanctions imposed on Russia in February, including blocking several Russian banks from the Society for Worldwide Interbank Financial Telecommunication (SWIFT), could incentivize more countries, either with sanctions or at risk of being sanctioned, to transact in E-CNY to avoid the consequences of the USD extraterritoriality. This is because the centralized ledger underlying the E-CNY may allow cross-border payments to bypass SWIFT. But so far, no additional memorandum of understanding (MoU) has been signed even though some of the countries risking sanctions could have done it. Of the many possible international applications for the E-CNY, trade settlement is thought to be the most immediate one given China’s massive share in global trade. Currently, only 20% of China’s cross-border trade is settled in RMB (Chart 4). But there is substantial room for improvement with the adoption of E-CNY since the digital currency can help to streamline the settlement process. 

Secondly, the use of E-CNY can also be promoted as part of the consumption stimuli measures. In fact, one important reason why the Chinese government has been hesitant about direct cash handouts is the concern that people may save that money instead of spending it. But the design of smart contracts within the E-CNY wallet can help overcome this problem since the government can set a deadline to spend the digital cash and even limit the usages in specified sectors. As a result, multiple cities, including Shenzhen, Xiong’an, Guangzhou and Chengdu, have incorporated E-CNY with the local consumption stimuli measures, via either direct digital cash handout or consumption vouchers. While more cities may follow, the scale of such programs is likely to be small in the near term given the fiscal constraints for local governments which are undergoing plummeting land sales and increased health-related expenditure. 

Regarding the headwinds, prolonged border controls are bound to delay the process of cross-border use of the E-CNY. On the one hand, the delay of many international events, such as the Asian Games, will slow the process of expanding the usage to foreign visitors. On the other hand, the plummeting outbound tourists will also postpone the experiments of E-CNY in cross-border payments by Chinese consumers overseas. 

And fundamentally, the non-convertible nature of RMB remains the Achilles’ heel for the global acceptance of E-CNY. While the process of China’s capital account liberalization has been accelerating in recent years, it is still asymmetrical since most of the developments concentrate in attracting inflows. Regarding outbound portfolio flows, some liberalization measures were taken while the RMB was strengthening in 2021, such as the southbound bond connect and some easing of the QDII quota, but the situation has changed radically given much worse sentiment on the back of lockdowns and more depreciation pressure.

In short, the technical benefits of the E-CNY can help to benefit from the increased demand to bypass the USD in a changing geopolitical landscape. But the strict border controls stemming from the zero-Covid policies will slow the cross-border use of the E-CNY. More generally, for the E-CNY to play a significant role in supporting the international use of the RMB, further liberalization of the capital account towards more convertibility of the RMB are still needed.

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