China has recently witnessed unprecedented capital outflow including foreign investment and people’s savings. The liquidity crisis is spreading across China, depositors’ protests have become a hot topic despite repression from authorities. At this point, the digital yuan (e-CNY) is probably the Chinese Communist Party’s perfect solution in preventing those customers from withdrawing and controlling capital flight.

Digital yuan is not just a currency but a control tool

The People’s Bank Of China (PBOC) has been working on a digital yuan since 2014. It set up a task force to create a virtual legal tender, according to a white paper in July 2021.

According to CCP’s propaganda and along with many technology experts, the introduction of the digital yuan will reduce transaction costs, make transaction information transparent, and stop smuggling and illegal money transfers.

It all sounds very positive but why is the PBOC promoting the development of a Central Bank digital currency (CBDC) when the CCP already has several “private” fintech payment platforms such as Alipay and WeChatPay? Fintech is a word that combines the terms “financial” and “technology” and has come to refer to any company that seeks to use new technology to disrupt the financial services industry. 

Why is the CCP opening the way for CBDCs to develop while they are banning private cryptocurrencies like Bitcoin and Etherium?

The answer is: the CCP wants more control!

In China, people’s spending is linked to their social credit score. The CCP will be able to collect fines without due process or debit the offender’s account by accessing their “wallet.” A wallet is a person’s private key to access cryptocurrency. And of course, there is a high probability that the digital yuan wallets will be linked to CCP-owned banks.

Imagine what would happen if someone in your business spoke out of line with the “direction” of the Party? It is very likely that your business will be denied access to revenue and will not be able to receive the digital yuan. If the digital yuan becomes the main currency in China, it means that your business is almost out of business.

The digital yuan, therefore, will help the CCP monitor, control, and silence people, as well as make companies submit to the CCP and beyond that.

Digital yuan is the perfect solution to prevent capital flight

For the CCP, the digital yuan or e-Chinese yuan is a tool to help it monitor capital flow more closely and prevent the collapse of the financial system when no one can withdraw money. The loud protests related to money withdrawal like in Henan will completely disappear when the traditional yuan is wiped out.

With the e-Chinese yuan, regulators can further limit the number of yuan that people are allowed to sell for foreign currency as well as prevent people from moving large sums out of China.

Transactions in digital yuan reflect on the balance sheet of the PBOC. That makes it easier for authorities to monitor currency usage even by nonresidents in China.

Since e-Chinese yuan can only be transferred between approved e-wallets, which are actually overseen by the PBOC itself, the Chinese authorities will be able to eliminate potential instances of speculation during the approval process because e-wallets have the ability to encode some user characteristics, such as the country of residence and the industry in which they work.

These details can be used as a basis to grant or deny people and businesses access to yuan payments or limit their payments to certain levels. The CCP can then be confident that any digital yuan circulating outside its borders will not fall into the hands of people it doesn’t want.

The digital yuan is programmable. Its usage, such as spending time frames can be customized. Michael Sung of FreeFlow Finance, a cross-border payments company said, “In idea any situation will be programmed into digital currencies.” He added “For instance, regulators may, for instance, encode limits on how a lot could possibly be offered for foreign currency exchange. That would assist them to restrict any runs on the foreign money, even when the yuan has been held by foreigners past their typical regulatory attainment.”

As such, the PBOC can also closely monitor payment flows. The exchange of cryptocurrencies to other currencies can be easily blocked with unapproved banks.

According to Caixin Global, testing the e-Chinese yuan began in four locations – Shenzhen in Guangdong province, Suzhou in Jiangsu, Xi’an New Zone in Hebei and Chengdu in Sichuan – by the end of 2019. A pilot program designed to test its functions, applications and reliability has grown to 23 cities and regions.

As of the end of May, about 264 million e-Chinese yuan transactions worth about 83 billion yuan ($11.8 billion) had been completed in the test fields, with more than 4.5 million merchants accepting payment in the digital currency.

Digital yuan can also prevent massive withdrawals

With the CCP’s financial system suffering from a worsening liquidity crisis, the digital yuan, with all its features, seems to be the perfect tool to stem the depositors’ protests, which have been spreading from small banks to big banks, and from province to province.

After the Henan Rural Bank froze depositors accounts without warning, the Agricultural Bank of China limited depositors’ daily withdrawals.

Some other Chinese state-owned banks are also accused of running away from customers when, in conjunction with local officials, using COVID-19 prevention software to track depositors, preventing them from moving to local commercial banks to withdraw money.

With the commercial banking system, the inability cover people’s cash withdrawals, also known as liquidity loss, is the worst risk. It is the beginning of a collapse that neither industry insiders nor customers dare to think of.

The wave of cash withdrawals shows that the Chinese no longer trust their banking system despite promises, censorship of speech, and even repression by the government on the issue.

Trust has always been the basis of the existence of any commercial bank. If trust is lost, the collapse of that commercial bank and then a system crash can happen.

Recently, a video of Bank of China run by depositors at a branch in Shenzhen went viral. The video shows the Bank of China branch located on Shiyan Street, Shenzhen, with only 2 manual withdrawal windows per day and 200 people lining up to withdraw money.

The video narrator said, “Let’s see. At the Shiyan branch of the Bank of China, people waiting for withdrawals line up at 6-7am. People even skip breakfast to line up. It’s already 10am, and we are all still there. We just lineup here without any chip number, and they won’t handle our inquiries. This is the Bank of China. This is the Shiyan branch of the Bank of China. Please come and see.”

Conveniently, the digital yuan expanded its testing coverage to four major provinces and will soon completely replace it throughout China. What does this mean? That means no one needs to withdraw cash. The digital yuan can be in the form of e-wallets as an application on personal computers, smartphones, or integrated in money cards for older citizens or people living in remote areas.

But no matter what form the digital yuan is hoarding in people’s wallets, it is not cash. Any coins that the PBOC puts into circulation are in different accounts that the PBOC fully manages, regulates, and monitors. The liquidity crisis and depositors’ worries can completely disappear with the arrival of the digital yuan.

Thus, with the rush to switch to e-Chinese yuan transactions throughout China to ease financial control, the collapse of commercial banks will no longer seem to be a headache for CCP leaders when the assets of the people are locked in the e-Chinese yuan.

And so, most likely, when the e-Chinese yuan officially completely replaces the traditional yuan, will the “zero-COVID” policy be boldly lifted by the CCP?

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