Chief Economist of CITIC Securities Research: Implications for the People's Bank of Digital Currency

Since Facebook published the Libra White Paper on June 18th, governments, central banks, and regulators have attached great importance or vigilance to private institutions to issue encryption-based stable currencies based on a basket of reserve assets. Unlike the conservative attitude of major international currency issuers, the People's Bank of China has shown an unusually enterprising attitude. First, on August 2, the People's Bank of China clearly stated that “accelerating the pace of research and development of legal digital currency”, and then releasing the central bank's digital currency design concept, technical structure, operating system, pilot test area, etc. through various channels, the information points to The currency may be launched during the year.

Today, mobile payment instruments such as Alipay and WeChat payment have become so fast. The People's Bank of China is eager to introduce legal digital currency. The goal is obviously not to further promote the convenience of domestic payment. Responding to the double squeeze of international leading currency and overseas digital currency and alleviating the contradiction of cross-border payment brought about by the long-term control of capital projects should be an important mission of the central bank's digital currency.

First, DCEP is and only "digital RMB"

The Bank of International Settlements (BIS) defines CBDC (Central Bank Digital Currency) as a digital form of central bank currency, which is different from the balance of traditional reserve accounts or settlement accounts. China's central bank digital currency name is DCEP (Digital Currency Electronic Payment), which is digital currency and electronic payment tools.

As a national project that began in 2014, the People's Bank of China has been developing digital currency for five years. Judging from the current public information, the digital currency does not have a technically pre-defined path, and adapts to the competition and iteration of digital technology. In the operation, it adopts the “central bank-commercial bank” two-tier operation structure and introduces market forces to participate. A partial centralization model is adopted for management to retain control of the central bank. Open, market-oriented, and superimposed with strong government guidance, it is expected that the currency will be quickly applied in the country after its launch.

According to reports, the People’s Bank of China’s digital currency is based entirely on the value of the renminbi. One unit of DCEP equivalent is one yuan. Therefore, there is no essential difference between DCEP and banknotes. They are central bank liabilities supported by national credit, but they are more dependent on digital technology in terms of currency form design and distribution.

As a digital alternative to M0 (banknotes and coins), DCEP adopts a “loan-coupled” model that does not require the opening of a bank account. As long as both parties have mobile phones and digital wallets, and even do not need to use the Internet, they can complete the payment point-to-point. In addition, DCEP can also load smart contracts within the scope of the currency function, and there is currently no more detailed disclosure of the specific contract design.

Second, a single anchor cannot compete internationally with a basket of currencies

The essence of money is credit, and what kind of currency the market chooses is the result of competition among various factors such as credit, availability, and liquidity.

Libra is anchored in a basket of currencies dominated by the US dollar. From the situation of the Libra hearings of the US Senate and House of Representatives in July, it is impossible for Facebook to circumvent the Fed or other institutions to regulate the currency. It is impossible to predict what kind of compromise Facebook and the regulatory authorities will reach, but it is certain that Libra, which is ultimately released, will not change its basic framework of dollar-based anchors. Facebook has a population of 2.7 billion users, and has the advantages of joining members in many fields such as global payment, technology, telecommunications, blockchain, venture capital, etc., which will greatly enrich Libra's application scenarios.

In contrast, DCEP, 100% is anchored in RMB. Even in the future issuers, with the participation of Internet giants such as Ali and Tencent, the single RMB value anchor feature is doomed to be unable to compete internationally with Libra. As for China's territory, blockchain and other technologies can completely bypass the interbank payment clearing system established by various countries, and it is difficult for the regulatory authorities to prevent Libra's inflow and penetration through traditional administrative intervention.

Third, the anchor setting may be more imaginative

In the era of sovereign credit currency, it is difficult for the renminbi to compete effectively with the currencies of developed economies. In the digital age, under the similar technical level, we may not expect a purely “digital renminbi” to win in the competition with “digital global major currencies”. . Focusing on international currency competition in the era of currency non-nationalization, it is necessary for DCEP to adopt a more open, bolder and more imaginative scheme in its anchor setting.

On the basis of retaining the DCEP retail function positioning, non-predetermined technical route, two-tier operating system and partial centralized management mode, the characteristics of a basket of reserve assets and SDR (Special Drawing Rights) should be modeled on Libra. The valuation method determines the value anchor of DCEP.

The most succinct, intuitive, most operational, and most market-accepted anchor is a weighted renminbi and US dollar, which is converted at a spot exchange rate to determine the currency basket, such as:

The US dollar in the DCEP is supported by official foreign exchange reserves, and the size of the US dollar reserve is the DCEP issuance cap. In general, the US dollar reserve in China's foreign exchange reserves is slightly more than 1.5 trillion US dollars. Even if all M0 is converted to DCEP, it only consumes about two-thirds of the US dollar reserve (the exchange rate is calculated at 7, 14537.85 billion DCEP, anchored 728.925 billion yuan and 10,384.18 billion US dollars). In this way, DCEP has a 100% redemption guarantee and has a sufficient credit base.

Referring to the “money tree” classification of IMF experts on digital currency, the above types of DCEP are both the accounting unit created by the central bank and belong to the object-based payment method. At the same time, they have the characteristics of anchoring a basket of reserve assets. A claim-based payment attribute, which can be called a composite currency that has both a weight and an object-based attribute.

Fourth, the "RMB + US dollar" composite coin has multiple advantages

The digital currency issued by the People's Bank of China is “not entirely renminbi”, but a certain weighted “RMB+USD” composite coin, which has many advantages.

Partially hedge exchange rate risk. The renminbi and the US dollar each have a certain weight, which can partially hedge the exchange rate risk of the renminbi against the US dollar. When the dollar appreciates, DCEP users who are accustomed to dollar denominations tend to reduce their holdings of DCEP, but DCEP users who are accustomed to renminbi will tend to hold more DCEP. Conversely, when the renminbi appreciates, DCEP users who are accustomed to dollar denominations tend to hold more DCEPs, but DCEP users who are accustomed to renminbi will tend to reduce their holdings of DCEP. There are hedging relationships in both scenarios.

Enhance the international status of the RMB. The issuance of the composite DCEP will make the People's Bank of China the second central bank outside the Fed and the means of providing US dollar payment. The US dollar in the composite DCEP plays a role in increasing the credit for the RMB, and the RMB will be borrowed from the sea. Due to the immediate adjustment of the spot exchange rate, in theory, 1DCEP is always equivalent to one yuan, which is beneficial to DCEP to fulfill the value scale function.

It doesn't matter that "bad money drives out good money." Some people may be worried that the composite DCEP after the US dollar increase will have a stronger market appeal than the previous RMB, and then there will be a significant substitution for the RMB M0. The People's Bank of China can solve this problem in two ways: one is to regulate the RMB exchange rate, and the other is to adjust the issuance of DECP (the upper limit is the size of the US dollar reserve). The composite DCEP did not generate new dollar demand. Nor can we expect DCEP to reduce dollar demand. As long as the RMB exchange rate does not significantly deviate from market expectations, the composite DCEP and the RMB can be equivalent.

Beyond the SWIFT payment clearing system. In recent years, efforts have been made to address the impact of SWIFT (Global Interbank Financial and Telecommunications Association) sanctions, including the European Union, China, and Russia, but the results have been minimal. Even if China is committed to creating CIPS (Cross-Border RMB Payment Clearing System), it is difficult to completely bypass SWIFT. SWIFT is the product of the telegraph era. The use of blockchain technology will enable the composite DCEP to get rid of SWIFT independent operation in at least retail and e-commerce.

Five conclusions

The composite DCEP idea proposed in this paper obviously has a lot of details to be discussed, including the type and quantity of the currency, the setting of the weight, the scale of the issue, the regulation of the issue, etc., but it does not prevent us from proposing the basic idea that the DCEP anchor should contain other currencies. .

DCEP is focused on the international, not on the territory. In theory, as long as the weight of the central bank's digital currency is higher than the weight of the renminbi in the existing international monetary system; as long as the payment status of WeChat, Alipay, etc. will not be weakened, any plan is worth discussing.

About the Author:

Zhang Anyuan, Ph.D. in Economics, Chief Economist of CITIC Securities, Member of the Chief Economist Committee of the Securities Industry Association, Director of the China Chief Economist Forum, Visiting Professor of Nankai University. He has worked in the 12-year policy study at the Macroeconomic Research Institute of the National Development and Reform Commission. Before entering CITIC Jiantou, he served as the chief economist of Dongxing Securities.

Source: CITIC Jiantou Securities Research (WeChat Public)