Inflation in China makes the digital yuan appealing

All the while, financial and trade transactions are becoming increasingly digital. Therefore, expectations that the RMB would weaken have been a critical driver of increased demand for digital currencies — including bitcoin.

And as more companies feel empowered to make the switch – or are forced into it by regulations – we can expect more interest in the digital yuan as an alternative. China has become the frontrunner in developing a Central Bank Digital Currency (CBDC) among the world’s biggest economies. With a cashless society already in sight, China would be well served by people to merge digital currency into its overall financial strategy. So, if you are planning to trade Digital Yuan, you may use a reliable trading platform like https://desire-crypto.com.

China is also a leader in ecommerce, as 80% of all Chinese purchases are done online rather than at brick-and-mortar stores. So it was only a matter of time before China’s ecommerce and mobile payment markets would converge. And in a world where cash is increasingly digital, mobile payments are surging. With the broadest smartphone penetration in the world, almost all Chinese can and do carry a mobile device. Even more surprising, China’s mobile payment market is outpacing its rivals. But assuming China can achieve wide-scale digital currency adoption within its borders, there will be no stopping it from spreading across the globe.

Reasons behind RMB devaluation:

In a move away from the dollar and euro, China has been increasingly adjusting its exchange rate policy towards the RMB. Since 1994, China has allowed its currency to be traded against a limited number of foreign currencies.

In September 2011, the People’s Bank of China (PBOC) introduced yuan/dollar and yuan/euro trading pairs on the Shanghai Foreign Exchange Trade System (FXTM). As they stand at US$5 trillion, China’s forex reserves are equivalent to those of Japan, France and Germany combined.

This policy shift is meant to stabilize the RMB and broaden its appeal as an international reserve currency. But it is also intended to provide further impetus for Chinese exports and support growth in investment and consumption in China. RMB’s depreciation:

The devaluation of the RMB against significant trading partners, including the US and Japan, has been anticipated for some time. But its excessive strength against several Asian and even global currencies was quite shocking. It was only confirmed by China’s 21% depreciation of its currency against the dollar in just two days.

Global demand for the RMB:

Given that China opted to continue with a policy of exchange rate flexibility, it is fair to assume that the RMB’s recent appreciation had little to do with international exchange rate forces. Instead, it underlines another trend within Chinese financial markets – digitalization. The heightened use of currency-exchange ATMs also demonstrates this trend. Although the RMB remains largely a cash-based society, over half a million such ATMs are spread across Chinese cities. So even though machine locations are often limited to major urban areas, China’s bank card penetration rate is still relatively low.

A push towards digital currency:

The increased ease with which consumers can buy products online has pushed for a move away from cash transactions. Chinese consumers tend to make smaller purchases in person. By contrast, higher-value items tend to be purchased on mobile devices like smartphones and tablets. China’s digital currency market includes both online payments and mobile payments. And what is more surprising is that 80% of Chinese consumers prefer to use mobile payment services for smaller purchases.

China has long been a global leader in e-payments, with the highest percentage of mobile payment users globally. The choice to go cashless facilitates the rise of mobile payments and exerts upward pressure on RMB appreciation.

Increasing adoption of digital yuan:

The widespread adoption of mobile payments has already upended China’s financial ecosystem. But with yuan-denominated digital currency, the PBOC could gain greater control of how money is moved around the country, including reducing reliance on cash.

Given that the RMB’s greatest attribute is its stability, there would be little incentive for the central bank to issue a digital version of its currency. But given the volatility in China’s stock market and a lackluster economic outlook, China has decided to embrace digital currency to maintain confidentiality. In particular, we can see whether RMB’s weakness will support China’s exchange rate policy and what impact a depreciating US dollar will have on the movement towards digitalization.