◎ Factional fighting in the CCP elite will complicate the digital currency’s implementation.
In mid-August, the People’s Republic of China Commerce Ministry announced the expansion of a digital currency pilot program in wealthier major cities in eastern and southern China. Trials will be conducted later in the poorer central and western regions in places that meet certain requirements, according to the ministry. Design of the digital renminbi, known as “digital currency electronic payment” (DCEP), will be finalized by the end of 2020. PRC authorities have said that the DCEP will help in Beijing’s crackdown on money laundering, gambling, and “terrorism financing.”
Based on available information, the DCEP is not a form of decentralized cryptocurrency (like Bitcoin), nor will it necessarily use blockchain technology. Rather, it is paper currency in digital form that is centralized and managed by the PBoC (and hence the Chinese Communist Party). To access DCEP during the pilot phase, customers will have to download an electronic wallet application authorized by the PBoC and link the app to a bank card to start making transactions (future versions of the DCEP wallet might not require linking to a bank account). The DCEP system will also support transactions without an internet connection (unlike third-party payment apps like WeChat or Alipay) where customers touch their mobile devices together to make a transfer.
The DCEP rollout is a new milestone in the CCP’s quest to strengthen its control over the Chinese people and perfect its techno-totalitarian regime. Widespread adoption of the digital yuan at home and abroad would aid the CCP massively in its endless struggle for self-preservation and ambitions for global hegemony.
We do not believe, however, that the CCP will ultimately succeed with its digital RMB. For one, the process of popularizing DCEP will engender a complex series of economic, financial, and technological problems that could hamper its adoption. Meanwhile, America will do its best to maintain dollar dominance and will not let the RMB become the premier world currency unchallenged.
The immense potential of DCEP and the high degree of hard political power it would grant the Party faction that controls the PRC central bank also means factional fighting in the CCP elite will complicate the digital currency’s implementation. This article will focus on problems stemming from DCEP and its relationship to the current state of CCP factionalism.
Why introduce a digital yuan?
Much of what the CCP does is geared to ensuring regime survival and advancing its political agenda of international domination. While it is still in the trial phase, the current design of the DCEP suggests that the CCP is planning to use it to help achieve these fundamental strategic goals.
Below, we look at three consequential outcomes of DCEP being successfully issued and adopted around the world.
1. RMB internationalization
The CCP has long been seeking to internationalize the RMB with the goal of challenging U.S. dollar dominance and eventually replacing the USD as the world’s reserve currency. In examining the CCP’s strategies for economic expansion in the digital age in 2018, we outlined how the CCP was using the Belt and Road Initiative to push RMB internationalization. The establishment of RMB-denominated crude oil and gold futures are also aimed at promoting global use of the yuan.
With DCEP, the CCP could end up setting and imposing technological standards for digital currency while internationalizing the RMB if it becomes widely adopted by China’s trade partners for transactions and settlement. Popularization of DCEP abroad could even see the U.S.-dominated SWIFT system bypassed in favor of the PRC’s Cross-Border Interbank Payment System; a decline of the SWIFT system will curb the effectiveness of U.S. financial sanctions against the CCP. In the CCP’s preferred scenario, popular international adoption of DCEP, as well as a worsening debt and dollar crisis in the U.S. and in developing countries, could quicken the pace at which the RMB displaces the USD as the global reserve currency.
2. “Hiding” China’s economic woes
The Chinese economy has been steadily declining over the past decade, with the decline becoming more pronounced after the Sino-U.S. trade war kicked off in 2018. This year, China’s economic prospects have become especially bleak in light of the coronavirus pandemic and severe flooding in over two dozen provinces; the fact that PRC premier Li Keqiang declined to set a GDP growth target for 2020 and instead emphasized so-called “six stabilities” and “six guarantees” are very telling signs that the Chinese economy is in bad shape.
The CCP, however, can use DCEP to “hide” some aspects of economic decline and minimize outbreaks of societal panic stemming from RMB shortages. For instance, some small- and medium-sized Chinese banks ran out of paper currency over the past year following a rush to withdraw cash in some areas. With DCEP, the PBoC can “negate” the problem of bank runs by vigilantly replenishing a bank’s digital currency supply (how the bank that has been hit with a digital bank run resolves the bad debts problem, however, is a separate issue). Meanwhile, the effects of inflation can be temporarily “hidden” with DCEP as people do not see each other pay for items with large stacks of physical cash. Finally, should the CCP press ahead with plans to partially close up China, it can impose a form of electronic “rationing” by limiting the purchase of food and essentials using DCEP within a certain timeframe, as well as the amount of goods that can be purchased at one time with digital currency.
3. Expansion of authoritarian control
DCEP, unlike cryptocurrency, is a highly centralized currency issued by a central bank that is designed to strengthen government oversight of financial transactions to the level of the individual. DCEP users may be handed a unique identification code or have to link their identification number and other personal electronic codes (like the health code that was rolled out during the coronavirus epidemic, or social credit system ID) with their electronic wallet. The CCP will be able to further track and monitor the financial activity of all DCEP users through their “financial ID,” thus expanding its authoritarian control over Chinese citizens to a granular degree.
DCEP may make payment transactions a breeze for its users, but will cause plenty of headaches for individuals who run afoul of the CCP regime, such as dissidents or human rights lawyers. Indeed, the prospect of being barred from making all digital transactions in a scenario where the DCEP system is prevalent in China and paper money is nearly phased out will effectively dissuade people (locals and foreigners alike) from challenging the CCP regime. In other words, DCEP will eventually become an important “stability maintenance” tool for the CCP in preserving regime survival; Chinese citizens and foreigners will be much less willing to stand up to the CCP when their survival and interests are threatened by being denied access to digital RMB that has reached a certain level of domestic and global use. In a scenario where the RMB is the reserve currency and DCEP is popular abroad, the CCP will be able to expand its domestic DCEP-linked authoritarian control measures overseas and better export its authoritarian model.
The CCP will also be able to carry out unprecedented monitoring of capital flows and gathering of economic data in a scenario where DCEP is widely adopted in China. This means that it will be virtually impossible for financial activity unwanted by the CCP to be carried out, including money laundering and various forms of financial corruption, financial arbitrage, shorting of the stock market, excessive funds flowing into the property sector, etc. On the plus side, the CCP can use DCEP to introduce beneficial social programs that would otherwise be compromised by official and systemic corruption. For example, the CCP can directly transfer epidemic relief funds to the e-wallets of citizens instead of relying on corruption-prone local authorities to dole out the cash. On the flip side, the CCP could see increased political instability as officials, and particularly the CCP elite, will be among the wave of people required to use DCEP and have all of their transactions become traceable. The tracking of officials’ finances will greatly limit both the legal and illegal opportunities available to them to line their pockets. With their interests hurt, even greater numbers of CCP officials will oppose Xi’s leadership and find ways to escape the regime.
Digital yuan and the factional struggle
As seen in the previous segment, a successful DCEP will have sweeping implications in China and abroad. A significant political outcome of a successful digital RMB is the transformation of the PBoC into an immensely powerful supra-authority organization (超級權力機構). With the ability to imperil a person’s survival by cutting him off from his finances, and the ability to gather valuable intelligence and dirt on any person through his digital transactions, the PRC central bank will become the regime’s ultimate “stability maintenance” apparatus. The PBoC Party Secretary will become an exceptionally powerful and important position—he could possibly have a greater say on economic issues than even the higher ranking PRC premier and vice premiers. The post is also certain to have unprecedented influence (especially considering its traditional role) over domestic security and disciplinary or supervisory work. Further, it goes virtually without saying that whoever holds the position will be closely involved with national security work should DCEP be widely used abroad. The prominence of the PBoC Party Secretary following the popularization of DCEP also means that Xi Jinping will only appoint trusted allies with expertise in financial and currency matters to the position. Current PBoC Party Secretary Guo Shuqing is a Xi ally, and PRC vice premier Liu He is a potential future candidate for the job (in joint capacity).
The CCP still has plenty of work to do to popularize DCEP to the point where the PBoC becomes a bona fide supra-authority organization. However, Xi’s factional rivals and others in the CCP elite will have likely projected what a successfully digitized Chinese yuan entails for their interests and the factional struggle. This will redouble their motivation to challenge Xi (with the goal of curbing his grip on power or even seeking his ouster) before his digital currency initiative comes to fruition.
Of the various cliques and factions in the CCP elite, the Party princelings and Jiang Zemin faction stand to lose the most from a successful DCEP because many of them are in the financial sector or are reliant on looser capital controls to accumulate and move wealth. The princelings also know that they are not safe even though Xi Jinping is also one of them, as the latter still has a strict anti-corruption campaign on the books. Indeed, Xi has demonstrated a willingness to arrest princelings and their bagmen over corruption matters, including Anbang’s Wu Xiaohui, CEFC China Energy’s Ye Jianming, and Tomorrow Group’s Xiao Jianhua. With DCEP, the Xi leadership will be able to keep an even closer eye on princelings, Jiang faction members, and others in the CCP elite by monitoring their digital financial activity. Tighter surveillance and restricted activities will incentivize those in the CCP elite who oppose Xi to push back harder against his leadership ahead of the 20th Party Congress to deny him a third term as General Secretary.
Control over money (錢袋子) is a less touted and “softer” instrument of hard political power in the CCP regime. The Party elite will no doubt view the potential for Xi to “weaponize” DCEP as highly disturbing, as Party factions and leaders have historically vied for control over the organs that bestowed hard political power, like the “sword” (槍桿子, i.e. the military), the “knife” (刀把子, the political and legal affairs apparatus), and the “pen” (筆桿子, propaganda organs). Control over domestic surveillance units (like the 12th Bureau of the Ministry of Public Security) was also important to gain leverage over political foes. Through DCEP, however, the PBoC (and Xi) would gain unprecedented surveillance, domestic security, and financial power, transforming it from a central bank into something akin to a financial “Eastern Bureau” (東廠), the notorious and much-feared Ming Dynasty spy and secret police agency. The CCP elite have already seen their interests suffer dearly under Xi’s grinding anti-corruption campaign and the empowerment of the Party’s disciplinary agency, the Central Commission for Discipline Inspection, which historically played a relatively minor role. It is unlikely that the Party elite, and particularly those opposed to Xi, will simply lie down in the face of Xi’s empowering another “softer” institution to further erode their interests.
It should be noted that Party princelings and Xi’s factional rivals will not be opposed to the idea of DCEP itself because it aligns with the CCP’s fundamental strategic interests. Rather, what the “anti-Xi coalition” fears is the prospect of a digital currency scheme in which they have little sway over its implementation. So long as the CCP exists and controls DCEP, whoever is in charge will see to it that the digital currency furthers the regime’s agenda of survival and domination.
