Get ready, here comes the D-RMB

SCMP has an interesting story today about a survey that shows little expectation among traders that the Renminbi might become a challenger to the US dollar in international trade. 

As the article says, China’s effort to promote the RMB as a global currency has made only marginal progress in the last three years. According to an international survey conducted by the Bank for International Settlements, the RMB is only the eighth most-traded currency, with a daily average turnover of US$284 billion, up from US$202 billion three years ago. Its share of all currency trades rose to 4.3 per cent from the 4.0 per cent in the 2016 survey.

By comparison, the US dollar was on one side of 88 per cent of all currency trades, little changed from three years ago. It was also the second currency in 95 per cent of all RMB-denominated transactions.

However, far more interesting is the commentary coming out of the mainland about the digital Renminbi, which appears increasingly likely to launch soon. Now that Shenzhen has been tapped with its further development, the question seems to be how soon it will start being deployed among the city’s smartphone-carrying population.

As this article explains, the D-RMB is essentially nothing more (or less) than a replacement for cash. It won’t be based on blockchain, for two reasons: because blockchain can’t handle the size of transaction China needs (consider Singles Day on Alibaba, for instance), and also because the D-RMB has to strike a balance, to put it mildly, between the state’s need for anti-AML enforcement and the individuals’ need for anonymity. 

But it will be a digital currency, which users will carry in digital wallets. Just as they now withdraw cash from an ATM and stick it in their physical wallet (or at least, people in Hong Kong and Macau do), in future they will withdraw the D-RMB from their bank accounts and store it in their digital wallets on their phones. Whether they choose to spend this D-RMB via an Alipay or Wechat Pay app, or transfer it direct to a friend, wallet to wallet, is moot.

The key to see will be not so much how the D-RMB runs within China, however. It will be crucial to understand how it is traded internationally. Imagine, for instance, what would happen to global currency markets if China were to strike a deal with, say, Iran or Venezuela, to trade oil in the D-RMB rather than the USD.

One might very well ask why they don’t do so already. The easy answer would be that a digital currency won’t need to run through the global banking system, which is dominated by banks that run on SWIFT and are at the mercy of the US government. Neither, for that matter, would it need to run via Facebook’s Libra.

Unlike the paper RMB, indeed, there will be only one on-ramp and one off-ramp for other currencies into the D-RMB. Digital currencies can’t be traded by moving bags of cash across the Luohu border. We aren’t going to go into the myriad ways a shyster might try to get around this, because that is obviously what is being looked at now in Shenzhen – in fact, it would be reasonable to believe that this question has been at the center of the PBOC’s R&D efforts in recent years. Suffice to say that the PBOC can be expected to have much greater control over the security of the D-RMB than they currently do over the paper kind.

We look forward to seeing what the BIS survey shows the next time they run it, in 2022. Our money would be on that share number having significantly jumped by then. And if that happens, we will likely all be looking back with nostalgia at the days when the RMB fell below 7 to the greenback, when Shenzhen began stepping up to its role as an international financial center on a par with London, New York and Hong Kong.

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