China’s Digital Currency: In the Eye of the Beholder

Few developments in China’s economy have generated as much interest and speculation recently as the new digital currency/electronic payment system (DCEP) launched by China’s central bank. This note aims to separate fact from fiction, examining what we can expect from the DCEP based on Chinese policy pronouncements, its functionality, and its implications for China’s global economic position. Our findings include:

 

  • China’s digital currency ambitions are not clear. The DCEP system is currently designed for retail consumer use rather than for wholesale bank-to-bank transactions. Its primary applications will therefore be in domestic rather than cross-border payments.
  • International use of China’s digital currency will be very limited in the medium term, facing similar barriers to those hampering foreign use of China’s analog currency. China’s persistent external surpluses and capital controls are unlikely to vanish anytime soon, and non-Chinese actors have few reasons to hold it relative to other currencies.
  • China may use coercive tactics to boost acceptance of the digital currency across borders, but has rarely done so to promote the analog RMB. Coercion would likely be counterproductive and slow voluntary adoption of China’s currency and payments systems abroad.
  • A small few actors may be attracted to China’s digital currency to circumvent international or US-led sanctions; they will likely be engaged directly with the Chinese state.

 

Posted May 5, 2021
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Property Market Chartbook, April 2021

China’s property industry reported strong yet moderating growth across most major indicators in Q1, flattered by comparisons to last year’s COVID outbreak. Sales are strong even relative to normal years despite tightening measures from both Beijing and local governments, risking more aggressive restrictions on purchases and developers’ financing. The land market remains weak in small cities unaffected by the new land auction system, suggesting weaker new starts and construction momentum ahead.

Posted May 5, 2021
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Q1 2021 China Macro Data Recap

China’s headline GDP growth surged to 18.3% y/y in comparison to last year’s COVID-related contraction, but sequential quarter-on-quarter momentum and industrial output slowed beyond market expectations. March credit growth disappointed and tipped the credit impulse into negative territory, suggesting weaker cyclical activity ahead in the second half of the year. Both retail sales and PPI growth were surprisingly strong in March, and the resilience of the export manufacturing sector remains a key area to watch in the coming months.

Posted April 20, 2021
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