Deputy Director of the Institute of Finance of the Academy of Social Sciences: It is not appropriate to be too optimistic about the role of the central bank’s digital currency in the short term

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Deputy Director of the Institute of Finance of the Chinese Academy of Social Sciences: It is not appropriate to be too optimistic about the role of central bank digital currency in the short term

Note: This article is a transcript of the author’s speech at the China Macroeconomic Forum (CMF) Macroeconomic Hot Issues Seminar (No. 20), which has been reviewed by me. Please be sure to indicate the source for reprinting.

Zhang Ming, deputy director of the Institute of Finance, Chinese Academy of Social Sciences, deputy director of the National Finance and Development Laboratory, director of the China Chief Economist Forum

What is the definition of digital currency?

I start from the three most representative digital currencies, namely Bitcoin, Libra and CBDC, and talk about their innovation and applicability.

The first is the cryptocurrency represented by Bitcoin. This currency was created by the private sector, not linked to any existing currency, and the total amount is roughly constant. In terms of innovation, Bitcoin is a groundbreaking new creation. But the key problem is that there is no government credit endorsement behind Bitcoin, and the total amount is constant, so the current holders hold it not for trading, but to wait for appreciation. From this perspective, Bitcoin is not a real currency, but a financial asset.

The second type is a stable currency represented by Libra. Its currency value is linked to a basket of currencies. Libra is also very innovative. Once it starts to be widely used, the challenge to the existing international monetary system and structure may be the biggest. But precisely because it is highly innovative and initiated by the private sector, governments of all countries, including the United States, are now very vigilant about this new potential challenge. So far, Libra is still an initiative and has not yet been implemented.

The third type is central bank digital currency (CBDC). A typical representative is the digital currency DCEP launched by the People’s Bank of China. It is relatively the least innovative. It is a sovereign currency that can form a certain substitute for M0 and is linked to the RMB one-to-one. This is because it is less innovative and easier to start and promote. For the People’s Bank of China, there are not too many potential risks and worries to promote it. But also because it only replaces M0, it is not much different from the past currencies. Therefore, the current market and the industry’s expectations for DCEP seem to be too high, thinking that it can solve the problems that the current financial system cannot solve, and that it will Significantly enhance the international status of the RMB. In terms of the current form of DCEP, the marginal changes it can bring to the current Chinese financial system and the existing international monetary system may not be very strong.

How does digital currency affect existing monetary policy, financial stability, and macroeconomics?

Regarding the impact of the central bank’s digital currency on macroeconomic and financial stability, I will discuss four small issues here. My core point is that the current market may be too optimistic about the role DCEP can have in the short term.

The first question is whether the introduction of digital currency can improve the transmission efficiency of monetary policy? We have always said in the past that the transmission efficiency of China’s monetary and credit system was low. my country’s central bank digital currency still adopts a two-tier system, that is, from the central bank to commercial banks, and then from commercial banks to the real economy. Because commercial banking systems have their own preferences and objective functions, they may not be able to pass liquidity to those who need money as the central bank wishes. Therefore, the introduction of DCEP may not significantly improve the transmission efficiency of the money market.

The second question is, can the central bank’s digital currency strengthen the structural function of China’s monetary policy? The market widely believes that digital currency can be used to achieve inclusive finance and support small and medium-sized enterprises. This goal can indeed be achieved, but it must be better integrated with fiscal policy. In other words, for digital currency to better perform the structural function of monetary policy, it means to give this part of digital currency directly to people who need money, such as low- and middle-income groups, small and medium-sized enterprises, etc., but in fact this is The transfer payment function of fiscal policy. Therefore, unless digital currency is used as the ultimate carrier of fiscal policy transfer payments, it is difficult for digital currency to strengthen the structural function of monetary policy through conventional channels.

The third question is, can the introduction of the central bank’s digital currency significantly promote the internationalization of the RMB? This is also more difficult. According to international experience, there are three main determinants of whether a country’s currency can grow into an international currency. They are ranked in order of importance. The first is the competitiveness of the currency’s financial market, including the depth, breadth and liquidity of the financial market. ; The second is the historically formed network of positive externalities and path dependence; the third is the country’s economic scale and the scale of international trade. Digital currency can indeed improve the convenience of cross-border payment, but the convenience of cross-border payment is by no means the most important indicator that determines the degree of internationalization of a country’s currency. Conversely, if the Federal Reserve launches a digital dollar, it will further strengthen the dollar’s status as an international reserve currency. The reason is simple, because among the three important factors that determine the degree of currency internationalization, the financial market, positive externalities, and the scale of economic trade have all been realized in the United States. Therefore, if the convenience of cross-border payments in the U.S. dollar can be further improved at this time, the U.S. dollar The consolidation of the global reserve currency status is indeed a good thing.

The fourth question is related to the Sino-US economic, trade and financial friction, that is, can the introduction of the central bank’s digital currency reduce my country’s dependence on the SWIFT system? Some people say that considering that the United States may threaten to cut off the SWIFT system, the introduction of the Chinese central bank’s digital currency at this time and the establishment of a new cross-border payment clearing system can reduce my country’s dependence on SWIFT. This view is probably too optimistic. The key to the establishment of the international payment and settlement system is not whether the residents of the country are willing to accept it, but the degree of acceptance by non-residents. If non-residents are not currently accepting traditional renminbi so much, why must they accept a new payment and settlement system based on digital renminbi? So the reason is similar. Whether a cross-border payment settlement network can be established depends on the competitiveness of China’s real economy and financial market. It is unrealistic to expect that a single digital currency can change all of this.

In addition, when discussing the impact of central bank digital currency on macroeconomic and financial stability, there is actually a hypothetical premise that the scale of digital currency must be large enough. If it is limited to the current small-scale pilots, if the proportion of digital currencies in the total M0 is still small, it is too early to discuss these issues.

What are the future development prospects of digital currency?

I will mainly talk about two prospects here.

First, in the future, on a global scale, different forms of digital currencies may present a competitive landscape. There are not only digital currencies of different natures like Bitcoin, Libra, CBDC, etc., but also central bank digital currencies of different types and currency calibers within CBDC, which may form a pattern of blooming flowers. It is worth noting that “let a hundred flowers bloom” here does not refer to the international reserve currency. The international reserve system is destined to be the territory of a few currencies. In the future, there will be two currencies that can serve as reserve currencies, one is a national currency, such as the US dollar, euro, renminbi, etc.; the other is a stable currency, whether it is SDR, eSDR or Libra. Have the potential to become an international reserve currency, because they themselves still rely on the credit of the major governments. In contrast, the cryptocurrency represented by Bitcoin is more a financial asset in nature and can only be regarded as a “digital currency” in a broad sense. In the future, international reserve currency competition will be very fierce, so it will not involve too many currencies.

Second, my speech today believes that the market may be too optimistic about the short-term role of central bank digital currencies, but it does not mean that I am not optimistic about central bank digital currencies. I am generally optimistic and long-term optimistic about the development prospects of central bank digital currencies. Regarding the evolution trend of the Chinese version of the central bank’s digital currency DECP (it seems to be renamed eCNY), here are four conjectures:

Will the central bank’s digital currency coverage exceed M0 in the future?

Will the central bank digital currency become a carrier of interest-bearing assets in the future instead of the current zero-interest assets?

Will there be a new third-party payment platform led or managed by the People’s Bank of China in the future? This is very important because it determines whether eCNY, Tencent, and Alipay are mainly cooperation or competition.

In the future, is it possible for the central bank of our country to implement different policies regarding the use of digital RMB and traditional RMB in cross-border flows and offshore markets? In theory, different policies should not be set for the two renminbi. However, compared with traditional RMB, it may be relatively easy for foreign residents to obtain digital RMB. But on the other hand, the Chinese version of digital currency is actually traceable, that is, the central bank has the ability to control the cross-border flow of large amounts of digital renminbi. The key lies in whether the central bank is willing to change the use of digital renminbi in cross-border flows and offshore markets. It’s easier.

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