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Virtual control: the agenda behind China’s new digital currency



Celebrations in China to mark the lunar new year of the Ox, which began on February 12, have been somewhat muted because of the coronavirus pandemic. The numbers of people travelling to visit relatives this year are down sharply, depriving family gatherings of a measure of joy.

But it is not all gloom. Authorities in several cities have given away tens of millions of renminbi as new year “red packets” that can be downloaded on to a smartphone. Beijing and Suzhou alone have doled out 200,000 red packets worth Rmb200 ($31) each in a public lottery.

Such philanthropy conceals a harder-hitting agenda. By handing out the traditional red packets in the form of “digital renminbi”, China’s authorities are conducting trials for a crucial new technology that could lead the world’s adoption of digital currencies and set global technical standards.

Although no official launch date has been announced, China is intent on becoming the first large economy to introduce a digital currency, showcasing its position as the global leader in payments technology to the world at next year’s Winter Olympics. Cambodia launched a digital currency, the Bakong, late last year. 

“Chinese policymakers are by far the most advanced in their thinking about a digital currency,” says the head of Asia business at a leading Wall Street bank, who declined to be named. “They are thinking about things that the rest of the world is nowhere near thinking about yet.”

“The digital renminbi will put every transaction on to the radar of the People’s Bank of China [central bank],” the banker adds.

A customer shows an ‘e-yuan’ on her smartphone in Beijing. The digital currency is issued and regulated by China’s central bank and is guaranteed by the state
A customer shows an ‘e-yuan’ on her smartphone in Beijing. The digital currency is issued and regulated by China’s central bank and is guaranteed by the state © Getty Images

China’s digital plan dovetails with broader ambitions for its currency as Beijing hopes the technology will help promote the renminbi internationally and weaken the US dollar’s supremacy. While bankers say the focus initially will be on using the digital currency in the domestic economy, it will probably be used for trade settlement in a number of years, several Chinese analysts said.

But the other objectives behind China’s virtual currency present a sharp contrast with public discussion about the issue in many other parts of the world. While in the US cryptocurrencies are steeped in the language of libertarianism, in China the digital currency project is tied up in the Communist party’s drive to maintain its control over society and the economy. The technology is partly designed to reinforce its surveillance state.

China’s digital renminbi is a “central bank digital currency”, making it in some ways the opposite of cryptocurrencies such as bitcoin. Cryptocurrencies are often decentralised; they are not issued or backed by governments. The “e-yuan”, by contrast, is part of China’s top-down design. It is issued and regulated by the central bank and its status as legal tender is guaranteed by the Chinese state.

BigRead: China has been one of the quickest adopters of digital payment systems

Its digital format enables the central bank to track all transactions at the individual level in real time. Beijing aims to use this feature to combat money laundering, corruption and the financing of “terrorism” at home by strengthening the already formidable surveillance powers of the ruling Communist party.

Beijing also hopes, analysts say, to use the digital renminbi as a means to reassert state control over its fintech industry and a vast e-payments market that is dominated by two huge private companies, Ant Group and Tencent. The technology could in effect become a rival to their cashless payments platforms.

China’s government is already engaged in a multipronged effort to rein in the power of the new payments firms, which led to Ant cancelling a planned $37bn initial public offering at the end of last year.

Samantha Hoffman, senior analyst at the Australian Strategic Policy Institute (ASPI), says social control is a priority for Beijing. “The [digital renminbi] is heavily about the party’s ability to exercise control,” she says.

Huge ramifications

China’s strategy is to popularise the digital currency by running city-level trials this year and next, having it ready for use by the time it hosts the Winter Olympic Games in late 2022, officials have said. This timetable puts Beijing far ahead of a long tail of national governments that are starting to experiment with the idea.

Some 60 per cent of more than 60 central banks surveyed by the Bank for International Settlements last year said they were “conducting experiments or proof-of-concept” studies on digital currencies, up from 42 per cent in 2019. Among these, 14 per cent are moving towards pilot programmes, the survey found.

In China, as elsewhere, the ramifications of adopting a digital currency are huge. It is not just that the digital renminbi stands to replace cash. It also presages the construction of a new payments system that threatens to undermine the market position of Alipay and WeChat Pay, the two wildly popular and privately owned platforms run by Ant Group and Tencent.

A Chinese shopper uses the WeChat Pay app in Beijing. While merchants can refuse to accept Alipay and WeChat Pay, they cannot decline to use the digital renminbi
A Chinese shopper uses the WeChat Pay app in Beijing. While merchants can refuse to accept Alipay and WeChat Pay, they cannot decline to use the digital renminbi © Kevin Frayer/Getty Images

The main reason for this is that the digital renminbi is distributed directly to the e-wallets of users by state-owned banks, thus setting up payments channels that circumvent Alipay and WeChat Pay.

In trials so far, users have been able to withdraw e-yuan via ATM machines on to their smartphones’ e-wallets. Then they pay for items by holding their smartphone app close to an e-yuan point-of-sale device. Such a system represents a clear alternative to Alipay and WeChat Pay, which are estimated to have a combined worldwide active user base of around 1.9bn.

“The wide use of the digital renminbi will affect the market position and profit model of third-party payment platforms like Alipay and WeChat pay,” says Wang Yongli, a former vice-president of Bank of China, one of China’s largest state-owned banks.

This is no small matter. Alipay and WeChat Pay not only form the backbone of China’s payments system in an economy that is already largely cashless. Their business also supports the share prices of Tencent, which is one of the world’s 10 largest companies with a capitalisation of more than $920bn, and Alibaba, which owns a stake in Ant Group.

A sense that the popularisation of the digital renminbi could come at the expense of Alipay and WeChat Pay is reinforced by Beijing’s messaging through state media coverage. In a dispatch from the streets of Beijing during Chinese new year, a reporter from CCTV, the official television station, said that using the e-yuan was “more convenient” than other payments systems.

BigRead: Most Chinese consumers now use online payments

“The digital currency will deal a blow to Alipay and WeChat as it could replace them,” says a director at a large state-owned bank. “It is likely that the government will use administrative power to promote the use of digital renminbi to undermine the monopoly on consumer data held by the technology firms.”

In fact, such administrative powers are inherent to the e-yuan itself. Because the digital renminbi is legal tender, no merchant can refuse to accept it and will, therefore, be obliged to install e-yuan terminals and payments systems after the currency is formally launched. The same is not the case for Alipay and WeChat Pay, which merchants are at liberty to refuse.

State media reports also trumpet a function of the e-yuan which they say makes it just as versatile as cash: the capacity for offline payments. If there is no internet connection, users can still transfer money between two offline devices by using what the state media calls “dual offline technology”.

This feature uses a type of near-field communications technology similar to Bluetooth, analysts say. It is not yet clear how reliable such systems — or the digital renminbi more generally — would turn out to be but Mu Changchun, head of the central bank’s Digital Currency Research Institute, has said that the “dual offline” technology has been “comparatively successful”.

China regards its centralised banking system as a crucial instrument of the party-state’s economic power. Whenever its control is threatened, as it was by the flowering of a freewheeling peer-to-peer lending sector as recently as 2016, the authorities move decisively to reassert their influence. Only some 29 of as many as 6,000 peer-to-peer lenders now remain following Beijing’s clean-up campaign. Similarly, the extraordinary success of Ant Group, before its share offering was axed, was seen as a threat by a powerful lobby of Chinese state-owned banks. 

Pedestrians pass the National Stadium in Beijing, which host some events of next years Winter Olympics. China intends to run trials of its digital currency this year and have it ready for use during the games
Pedestrians pass the National Stadium in Beijing, which hosts some events at next year’s Winter Olympics. China intends to run trials of its digital currency this year and have it ready for use during the games © Mark Schiefelbein/AP

While it is clear that the digital renminbi payments ecosystem has been designed to run independently of Alipay and WeChat Pay, it is likely that the two private payments platforms will nevertheless also be used for e-yuan transactions, analysts say. Thus, for a while at least, the private platforms will be enlisted to promote the e-yuan’s rise.

“The increase of digital renminbi’s market share will come at the expense of WeChat Pay and Alipay,” says Zou Chuanwei, a specialist in digital currency at Wanxiang Blockchain, a research institute in Shanghai. “The government is tightening regulatory control over fintech groups and the digital currency’s replacement of Alipay and WeChat Pay will hurt their consumer lending business,” he adds.

Tool of control

Fifteen centuries after China invented banknotes, the nature of money is set to fundamentally change. Back then, in the Tang dynasty (618 to 907) paper money was little more than an IOU and became known as “flying cash” because, unlike metal money, it had a tendency to blow away.

But the digital renminbi presents a step change. It is far more than just a medium for exchange. Beijing sees it both as a bulwark against the potential encroachment of foreign digital currencies, such as Facebook’s Diem, and as a tool to facilitate mass surveillance over the Chinese population, analysts say.

In mid-2020, Mu at the Digital Currency Research Institute argued that the digital renminbi would prevent Facebook’s Libra — the original name for Diem — from encroaching on China’s monetary system. Such thinking followed similar soundings from 2018 when central bank researchers warned that the advent of digital tokens — called stablecoins — linked to the US dollar could damage Beijing’s efforts to internationalise the renminbi.

But aside from acting as a bulwark against unwanted foreign cryptocurrencies, Beijing’s ambitions for the digital renminbi derive from a deep-seated impulse towards social control, analysts say.

Police patrol in front of the People’s Bank of China in Beijing. Samantha Hoffman of the ASPI says ‘the [digital renminbi] is heavily about the party’s ability to exercise control’
Police patrol in front of the People’s Bank of China in Beijing. Samantha Hoffman of the ASPI says ‘the [digital renminbi] is heavily about the party’s ability to exercise control’ © Greg Baker/Getty Images

“The digital renminbi is likely to be a boon for CCP surveillance in the economy and for government interference in the lives of Chinese citizens,” wrote Yaya Fanusie and Emily Jin in a report last month for the Centre for a New American Security, a Washington-based think-tank.

They say that deploying the e-yuan will set the central bank up to mine a huge trove of data on its citizens’ economic activity. This dovetails with a government fintech plan issued in late 2019 that foresaw a fusion of financial data to promote the construction of a “nationwide integrated big data centre”.

“If the central bank can successfully roll out the digital renminbi, it indeed would be a crucial tool for domestic control,” says Jin. “People could still try to circumvent the monitoring capability of [the currency], but I’d imagine that would be incredibly difficult given that the system would allow the central bank to track real-time transactions.”

If such capabilities do materialise, the People’s Bank of China could take on enhanced powers of discipline enforcement and would have the ability to take punitive action by blocking transactions if the situation called for it.

Hoffman at the ASPI, which published one of the first in-depth reports on the digital renminbi last year, says the e-yuan will significantly expand the party’s surveillance capabilities.

“Through the [virtual currency] the party-state would have visibility over all financial transactions,” she says. “The transactions are fully traceable, and there will be no such thing as true anonymity for users.”

Exemptions from scrutiny?

The level of anonymity that will be accorded Chinese citizens who use the digital currency remains an officially grey area. Mu at the Digital Currency Research Institute, speaking at a conference in Singapore last year, said that a system of “controllable anonymity” would be rolled out. 

Mu Changchun of the Digital Currency Research Institute says the digital renminbi would prevent Facebook’s digital currency from encroaching on China’s monetary system
Mu Changchun of the Digital Currency Research Institute says the digital renminbi would prevent Facebook’s digital currency from encroaching on China’s monetary system © Getty Images

“We know the demand from the general public is to keep anonymity by using paper money and coins . . . we will give those people who demand it anonymity in their transactions,” Mu told the conference. 

“But at the same time, we will keep the balance between the ‘controllable anonymity’ and anti-money laundering, CTF [counter-terrorist financing], and also tax issues, online gambling and any electronic criminal activities,” he added.

Hoffman says such ambiguity raises concerns. “Requirements like anti-terrorist financing or anti-money laundering are normal for central banks, but what is different in China is who is scrutinised,” she says. “The definition of a terrorist includes the party’s political opponents.” 

Such concerns could hamper Beijing’s longstanding aspirations to promote the use of its currency internationally as part of China’s long-range ambition to free itself from having to settle most of its trade transactions in the US dollar.

“If the Communist party will get insight into every trade we do through the digital renminbi, then I think a lot of people outside China will prefer not to use it,” says one businessperson in Hong Kong, who declined to be named.

Nevertheless, China is pressing on with its internationalising verve. It agreed last month to form a joint venture with Swift, the Belgium-based global system for cross-border payments, in a move that observers say is aimed at promoting use of the digital renminbi.

The new entity, called Finance Gateway Information Services Co, is charged with integrating information systems to facilitate the rollout of the digital currency, according to people familiar with the venture. Other shareholders in the venture include China’s Cross-Border Interbank Payment System (Cips), a competitor of Swift that handles trade settlement in renminbi. 

However, even bankers within China’s own state-dominated system say that optimism about the international uptake of the digital renminbi must be tempered by reality. “A bigger goal of ours is to challenge the dominance of the US dollar in international trade settlement,” says the director at a large state-owned bank. “But progress towards this will only be gradual.”

The reasons behind such expectations of slow progress derive from an old-fashioned, analogue problem. Foreigners have little incentive to hold renminbi as long as access to China’s financial markets remains complex and opaque to all but specialist investors.

“[A digital renminbi] would not banish many of the problems holding the renminbi back from more use globally,” said Maximilian Kärnfelt, an expert at Merics, a Berlin-based think-tank on China. “Much of China’s financial market is still not open to foreigners and property rights remain fragile. ”

Additional reporting by Hudson Lockett in Hong Kong

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Emerging Markets

Narendra Modi’s popularity slips as Covid crisis hammers India




Narendra Modi’s popularity has fallen during India’s deepening Covid crisis, according to an opinion poll, as the country reports more than 400,000 daily infections in a brutal second wave.

The prime minister’s approval rating fell to 65 per cent on May 4, down from 74 per cent at the end of March, according to Morning Consult, the US data company — the lowest level since the agency began tracking Modi’s rating in August 2019.

The Indian leader’s disapproval rating also rose to its highest level since the tracker was launched, climbing to 29 per cent from 20 per cent.

Modi’s approval rating remained high compared with other global leaders, but the country’s health and humanitarian crisis has taken a toll.

The prime minister has a strongman reputation but has been accused of indifference in the face of the Covid-19 disaster as he campaigned in state elections even as the outbreak worsened.

“One of the things that Modi has really been good at is perception management. He’s always been very good at messaging,” said Ronojoy Sen, senior research fellow at the Institute of South Asian Studies in Singapore. “This is the first time I would say that his messaging has been awry.”

India’s death toll from the second wave has reached about 4,000 people per day © AP

Modi’s government has sought to deflect blame for the calamity on to state governments and the public for failing to follow pandemic protocols.

As deaths have risen, Harsh Vardhan, the health minister, has also cited official data to boast that India’s fatality ratio was lower than those of richer countries.

However, in a stinging letter to Modi on Friday, Rahul Gandhi, leader of the opposition Congress party, sharply criticised the government for a “lack of a clear and coherent Covid and vaccination strategy as well as hubris in declaring premature victory”.

The letter called for more decisive action to control the spread of the virus, as well as greater scientific tracking of the virus and its mutations.

“Allowing the uncontrollable spread of this virus in our country will be devastating not only for our people but also for the rest of the world,” Gandhi wrote, adding that India was a fertile ground for the virus to mutate into “a more contagious and a more dangerous form”.

India reported a record 414,188 infections and 3,915 deaths on Thursday. There have been more than 234,083 confirmed deaths from the disease in the country.

However, most experts believed the figures severely undercounted the magnitude of the crisis because of a lack of testing, especially in small towns and rural areas.

“Right now, data is very corrupted,” Gautam Menon, a professor of biology at Ashoka University, told a recent seminar. “It’s good in some states and it’s very bad in other states.”

Many epidemiologists believe India’s latest outbreak is set to peak in the coming weeks and caseloads will gradually fall, partly helped by lockdowns implemented by some state governments.

The country’s vaccination campaign is losing momentum, however, because of an acute shortage of jabs. The Modi government has been accused of failing to adequately plan its inoculation campaign.

India administered 1.6m vaccines on Thursday and the seven-day moving average of daily vaccinations has fallen to 1.4m, down from a peak of 3.6m in mid-April.

Many Indians were incensed to see Modi boasting of the huge sizes of crowds gathered for his recent election rallies in West Bengal state as the country struggled to access life-saving drugs, hospital beds, oxygen and vaccines.

The prime minister’s Bharatiya Janata party lost its bid to seize power from the Trinamool Congress party in Sunday’s election despite Modi’s efforts.

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Africa celebrates suspension of Covid vaccine patents




African health officials were on Thursday celebrating what one called a “bold and wonderful” breakthrough after the Biden administration threw its weight behind a temporary suspension of intellectual property rights on Covid-19 vaccines.

African Union officials hope that at least three countries — South Africa, Senegal and Rwanda — will develop the capacity to produce vaccines for the continent, including the mRNA-type vaccines that emerged as an innovative technology against Covid-19.

John Nkengasong, director of the Africa Centres for Disease Control and Prevention, welcomed the US administration’s backing of an IP waiver, a position that is supported by dozens of developing countries led by South Africa and India.

It would, he said, “definitely be a great influence to facilitate the mRNA manufacturing agenda”, adding that there are “very focused discussions” about producing vaccines on the continent.

South Africa has some of the continent’s most advanced vaccine knowhow, including Aspen, a Durban-based company that plans to “finish and fill” — though not make from scratch — 300m doses of Johnson & Johnson’s vaccine this year. The Pasteur Institute in Dakar, Senegal, also has vaccine-producing experience, making small quantities of yellow fever jabs each year.

John Nkengasong, director of the Africa Centres for Disease Control and Prevention, welcomed the Biden administration’s backing of an IP waiver © Zacharias Abubeker/FT

In addition, Paul Kagame, president of Rwanda, suggested Kigali could become a vaccine hub. “It is important for Africa to forge public-private partnerships for vaccine manufacturing on our continent,” he said last month, adding that Africa needed to accelerate a continental approach to medicines regulation. “Vaccine equity cannot be guaranteed by goodwill alone,” he said, adding that it was time for African countries to stop “being sorry for ourselves” and act.

Africa is extremely dependent on India for its vaccine production, a weakness that has been exposed by a temporary Indian government ban on the export of Covid-19 jabs. Less than 1 per cent of Africans have received a single dose of Covid-19 vaccine and new supplies have all but dried up.

Officials warned there was still a long way to go before African manufacturers could start production. “The fact that the US has indicated it is willing to waive IP rights does not mean that it is actually going to happen,” said Ayoade Alakija, co-chair of the Africa Vaccine Delivery Alliance, who anticipated pushback from pharmaceutical companies and perhaps other countries in the EU and elsewhere.

The first step, said Rebecca Enonchong, a Cameroonian technology entrepreneur and board member of the World Health Organisation Foundation, was to “ensure the patent issue was not an issue”. But even then, she said, it would take time to build up the physical and skills capacity necessary to make mRNA vaccines. There is also a global shortage of vaccine inputs, including nucleotides, enzymes and lipids as well as of vials, caps and syringes. “I think it is unlikely that we will be able to ramp up for this pandemic,” Enonchong said.

Kiran Mazumdar-Shaw, chair of Biocon, a Bangalore-based biotech company, said she did not see IP as the biggest obstacle. “Today, everybody is talking about patents, patents and patents. Even if they don’t enforce patents, how many people can produce Moderna vaccines at scale?” she said, referring to one of the mRNA vaccines.

Building manufacturing capacity in the developing world was “the next big issue”, said Fatima Hassan, founder of the Health Justice Initiative, a South African campaigner for access to vaccines. There had been at least 50 applications already to a WHO hub for transferring mRNA technology, she said, which “indicates that there is definitely interest around the world”.

Two decades ago, South Africa led the battle, along with Brazil, against pharmaceutical companies’ defence of patents on HIV medicines. Legal victories finally forced companies to slash prices of antiretroviral drugs for developing countries, but not before millions of people had died of the disease. South African diplomats pressing for the temporary suspension of patents on Covid-19 vaccines said that “passing this waiver makes ethical, epidemiological, and economic sense”.

Additional reporting by Amy Kazmin in New Delhi

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A harrowing brush with Covid as India is ravaged




As a foreign correspondent, my job is to tell India’s stories, not be part of them. But when I started feeling feverish while writing an article about Covid-19 vaccine policy last month, I had a gut feeling that the Sars-Cov-2 virus had found me.

I hoped it was exhaustion that I’d sleep off but the next day, still feverish, I was urged to take a Covid test. A leading diagnostic lab chain, which earlier had run an efficient home-testing service, had stopped answering its phones and responding to online requests. But a doctor friend persuaded one of the lab’s phlebotomists to collect my sample. Two days later, the results confirmed I was part of the ferocious coronavirus wave battering India and pushing its healthcare system to breaking point.

Over the following days, my physical symptoms remained mild. But it was still harrowing to be sick from a notoriously unpredictable virus knowing that drugs, hospital beds and oxygen were scarce. I suffered constant anxiety knowing I’d struggle to get medical help if I took a turn for the worse.

I quickly discovered that I’d been so focused on avoiding infection that I had no clue what to do once sick. A friend connected me to a Kolkata-based infectious disease specialist, who felt I was at low risk for severe illness. I’d had the first dose of a Covid vaccine 10 days before my fever started. But the doctor urged me to treat the illness aggressively from the start, given the chaos at hospitals.

He prescribed the antiviral drug, favipiravir, now undergoing clinical trials in the UK as a potential Covid-19 therapy but already approved in India for emergency use. Many of his patients had taken it, he said, and none suffered severely, including people in their 90s.

Normally, I’m reluctant to medicate. I knew favipiravir’s effectiveness as a coronavirus treatment wasn’t yet scientifically validated. But with hospitals turning away ailing patients, the logic of taking an experimental drug made sense. The challenge, I discovered, was to get hold of it.

I called five pharmacies, but all had run out of stock. A friend called six more to no avail. I panicked — the doctor wanted me to start the drug fast and Delhi was hours from the start of a weekend curfew. Then a friend, who’d heard I was Covid-19 positive, called.

“I’m looking for this drug,” I told her. “Any idea where I can get it?” She said she’d check. It turned out that people with foresight had prepared small emergency drug stashes. Her friend had such a stash and was willing to share it.

I was elated to get the pills to start treatment that night. But it wasn’t enough for the prescribed course. Days later I spent hours calling pharmacies in an unsuccessful hunt for more, before finally begging an industry friend to help.

My difficulties pale in comparison with the desperation, anger and grief beyond my sickroom. My Twitter feed was filled with pleas for hospital beds, oxygen cylinders, the antiviral remdesivir, plasma or a place in an intensive care unit. Top hospitals begged on Twitter for refills of dwindling oxygen supplies. Friends and many professional contacts were fighting for their lives. Doctor friends were weeping with impotent rage.

There was much grim news of death. A former Indian ambassador died after hours waiting in a hospital parking lot for admission; inpatients whose oxygen ran out; a top politician’s 34-year-old son, young journalists. Crematoriums struggled with an unprecedented flow of bodies.

I decided I had to tune out of the unfolding crisis, to ensure my physical recovery and to protect my mental health. I stopped checking Twitter. Newspapers piled up, unread.

Once I felt better and tuned back, I saw Narendra Modi’s government had cynically expanded eligibility for vaccination to all over the age of 18, despite an acute shortage of jabs.

And with thousands dying daily, often for want of medical help, the health minister was callously citing dubious official data to claim India’s Covid fatality rate was lower than richer countries — hardly consolation to grief-stricken families.

Today, I’ve recovered from my encounter with the virus. It will take far longer to get over the trauma of watching this calamity engulf the place I call home.

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