'Pilot Payment in Hong Kong'... Digital Yuan Debuts on the International Stage

People's Bank of China Plans Offshore Payment Pilot Test with Hong Kong Monetary Authority
Preparing for Overseas Payments with Legal Tender Tests in Hong Kong
Challenges to Dollar Hegemony Raised... "Speed and Convenience Are Key"
US Tension... Former Treasury Secretary Henry Paulson Says "Financial Dominance Strategy Must Be Priority for Next Administration"

[Image source=Reuters Yonhap News]

[Asia Economy Reporter Hyunwoo Lee] The People's Bank of China, which is conducting a pilot distribution of the digital yuan, is expanding its trial stage to Hong Kong. Given that Hong Kong uses a different legal tender from mainland China, this is expected to serve as an opportunity to explore the digital yuan's potential entry into the global market. This move is likely to strengthen the view that China, under U.S. sanctions, is challenging the U.S. dollar's hegemony through digital currency.

According to local Chinese media including Global Times on the 10th, the Hong Kong Monetary Authority (HKMA) recently announced plans to conduct a pilot test for offshore settlement of the digital yuan in cooperation with the People's Bank of China. HKMA Chief Executive Wei Wei-yuan stated, "Although the specific schedule has not been disclosed, offshore payments using the digital yuan are entirely feasible and will provide greater convenience to travelers between Hong Kong and the mainland." He added, "The network experiment for offshore settlement with the Bank of Thailand, the central bank of Thailand, which has been ongoing since last year, was also successful."

The scale of digital yuan payments is currently minuscule compared to the U.S. dollar payment system (SWIFT). However, the experiment with China's digital yuan in Hong Kong signifies an expansion from internal tests?both public and private?conducted in major Chinese cities such as Shenzhen, Suzhou, Xiong'an, and Chengdu, to an external evaluation for offshore settlement. CNN reported, "Since Hong Kong uses the Hong Kong dollar, a different legal tender from China, success in testing here would mark the official start of the digital yuan's internationalization," adding, "This could significantly enhance the internationalization and status of the yuan, which currently accounts for just over 2% of the international payment market."

U.S. economic magazine Forbes also downplayed the digital yuan's current threat to the U.S. SWIFT system but analyzed that if the U.S. ignores it, the digital yuan could rapidly grow by leveraging transaction speed and convenience. Forbes reported, "Currently, about 1,023 financial institutions from approximately 92 member countries are trading on China's Cross-Border Interbank Payment System (CIPS), with an average daily transaction volume of around $19.4 billion," noting, "This is still very small compared to SWIFT, which has 200 member countries and over 11,000 financial institutions transacting more than $5 to $6 trillion daily." However, it emphasized, "If the digital yuan is used internationally, all costs and time associated with foreign exchange transactions would be eliminated, enabling very fast and convenient transactions. Although the U.S. currently adopts a strategy of ignoring the digital yuan as a non-threat, it cannot continue to do so indefinitely."

The expansion of offshore transactions using the digital yuan also reflects confidence in the Chinese economy. Since the COVID-19 pandemic, overseas investment funds have been flowing into China, which has performed relatively well compared to the U.S. and Europe. The offshore yuan-to-dollar exchange rate in Hong Kong reached 6.4927 yuan, the highest in two and a half years.

The news of the digital yuan's imminent commercialization has also boosted Bitcoin prices. According to cryptocurrency media CoinDesk, Bitcoin surged nearly twofold from $10,741 in early October to $19,107 recently. While Bitcoin is gaining attention more as an investment asset than speculation, CoinDesk analyzed that the Bitcoin rally "may also be linked to China's digital yuan."

Regarding China's currency expansion, mainstream U.S. economists have also voiced concerns. Former U.S. Treasury Secretary Henry Paulson wrote in a Wall Street Journal (WSJ) column on the 9th (local time) titled "China Wants to Be the World's Banker," stating, "U.S. financial leadership is under severe threat from intense global competition," and advised, "The incoming Joe Biden administration should prioritize strategies to maintain America's financial supremacy."

U.S. intelligence agencies have also issued warnings. In early last month, John Ratcliffe, Director of National Intelligence (DNI), sent a letter to Jay Clayton, Chairman of the U.S. Securities and Exchange Commission (SEC), expressing concern that "China's issuance of state-backed digital currency could threaten the U.S.," and warned, "With half of the world's cryptocurrency mining operations located in China, the introduction of digital currency could allow China to dominate this sector entirely."

This content was produced with the assistance of AI translation services.