May 30 (Reuters) – China’s central bank is making a broad push to expand the use of the digital yuan at home and abroad, several industry sources said, putting Beijing on a different – and potentially competitive – path from the United States in building the currency’s future.
In a series of measures, many unveiled here for the first time, the People’s Bank of China (PBOC) is giving banks policy benefits and background guidance to expand the use of the digital yuan, also known as CNY, in areas ranging from lottery to green electricity costs and capital spending.
Banks are also under pressure to expand the use of the digital yuan in cross-border transactions, particularly along the Belt and Road Initiative, where lenders are scrambling to develop complementary products including loans, letters of credit and loans, sources said.
All sources declined to be identified as they are not authorized to speak to the media.
The PBOC did not respond to a Reuters request for comment.
China’s bet on the digital yuan is in sharp contrast to that of the US, where President Donald Trump has embraced stablecoins while banning domestic use of the central bank’s digital currencies.
Some industry sources said Beijing’s move was partly driven by a desire to reduce its dependence on a global payments system dominated by Western institutions and centered on the dollar as the world’s reserve currency.
The digital yuan acts as a technological backstop, helping to ensure that China’s international trade continues without interruption in the future, a concern underscored by external instability related to the war in the Middle East, one of the industry sources said.
“The war has exposed the dangers of dollar weaponization, highlighting the urgent need for dollar withdrawal among Middle Eastern oil producers,” brokerage China Securities Co said in a report, saying the Iran conflict is accelerating the yuan’s international volatility.
As a result, the yuan’s global influence could expand “from trade to the realm of geopolitics,” it wrote.
SMALL FOUNDATION, BIG AMBITIONS
To be sure, the digital yuan is starting from a low base and faces structural limits on how far it can expand.
Cumulative digital yuan sales had reached 16.7 trillion yuan ($2.47 trillion) as of November since its start in 2019, according to the latest official data, compared to 279 trillion yuan in China’s UnionPay card transactions by 2025 alone.
In cross-border digital payments, “China and the US are the two engines of the world economy and both are pushing their standards,” said Xin Yan, CEO of Sign, which builds digital infrastructure for governments and institutions.
China’s digital yuan is more compatible with the banking system but is “not friendly to foreigners,” Xin added.
The latest push gained momentum after China earlier this year began allowing interest payments in digital yuan in a major policy shift. In April, authorities doubled the number of officially operating banks to 22.
The move effectively transforms the digital yuan into a bank balance deposit loan, greatly increasing its incentive to promote adoption as it counts toward deposit screening targets and enables the development of more credit and wealth management products, industry sources and analysts said.
An insider in the fintech industry that provides IT services to banks said that while progress has been slow in recent years, the Chinese government appears to be “serious about this” about driving widespread adoption of digital currency.
LOTTERY GAME, IRRIGATION OF MONEY
Digital yuan deposit balances and account numbers are now key metrics in how banks are evaluated, the person said, adding that the aim is to build critical mass and an ecosystem that attracts broad participation.
To promote domestic consumption, the PBOC is testing applications using “smart contracts” – embedded systems that trigger automatic payments when predefined conditions are met.
The pilots include lottery draws, prepaid cards, government spending and supply chain financing, industry sources said.
Authorities are also exploring the digital yuan to crack down on medical insurance fraud and track the use of green electricity, using its ability to track cash flows with precision, the sources said.
Local governments have set standards for access to the numbers and are exploring internal use cases that include payroll and health care payments, said one person at the payments company.
The PBOC is also considering establishing a clearinghouse similar to China UnionPay to process digital yuan transactions between all operating banks and improve efficiency, the sources said. This use has not been previously reported.
CONTINUATIONS ON PAPERS
The digital yuan is unlikely to disrupt retail payment behavior dominated by Alipay and WeChat Pay, whose main focus is on global payments between businesses, industry sources said. However, expansion in other countries poses even greater challenges.
Zhou Xiaoquan, an official at the Shanghai Financial Commission Office, said the city is encouraging institutions to adopt mBridge, a central bank-backed platform that connects China, Hong Kong, Thailand, the United Arab Emirates and Saudi Arabia.
He noted at last month’s conference that business-related requests are already affecting the exchange of goods and services and ship insurance.
Cross-border payments with ASEAN countries are very important, one of the industry sources briefed on the regulator’s thinking said, although a key obstacle is that overseas counterparts have shown limited enthusiasm for accepting the digital yuan.
For yuan internationalization to gain momentum, foreign partners must be willing to use it, the source said, warning that “it is still a long way off.”
(Reporting by Reuters staff; Editing by Sumeet Chatterjee, Paritosh Bansal and Shri Navaratnam)
