Digital RMB: Assessing the benefits-and challenges-of China's new currency - Deloitte
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CFO Insights
January 2021
Digital RMB: Assessing the benefits—and
challenges—of China’s new currency
Throughout last year, China reported The possibilities are not lost on CFOs. In important implication of DC/EP for MNCs
substantial progress on its digital renminbi fact, in Q4 2020 CFO Signals report, almost concerns changes to China’s electronic
(RMB) and electronic payment system 40% of respondents expect the RMB’s payment capabilities and usage. Chief
(DC/EP), and is now testing it in a growing use as a trading currency to increase, and among those is greatly enhancing the
number of cities. And as these new 41% expect digital currencies for business ability of the People’s Bank of China’s
capabilities are introduced and evolve, CFOs transactions overall to rise (see Figure 1). (PBOC) to monitor payments and clearing
at multinational companies (MNCs) have a And in this issue of CFO Insights, we’ll discuss data, which will strengthen its ability to fight
leading role to play in understanding how to both the introduction and evolution of fraud, illegal foreign exchange transactions,
help capture value from them. electronic payments in China, as well as the tax evasion, and capital flight.
implications for MNCs going forward.
First, combined with the government’s China’s ruling party has long focused on
recent moves to regulate the country’s Timeline: Diversification of electronic direct control over financial services as a
dominant e-payment processors, the DC/ payments major lever for economic management,
EP could help MNCs make inroads into the While a great deal of attention has been with just a couple of dominant e-payment
country’s large and growing e-payment devoted to China’s digital RMB―which will systems receiving regulatory approval and
market. In addition, the initiative could be an electronic form of money (cash in accommodating banking licenses as far back
potentially reduce MNCs’ business risks circulation) that official reports claim will as 2011. Mobile transactions reached $49
caused by the complexity and costs of both eventually replace paper currency―an trillion in 2019, accounting for four of every
domestic and cross-border settlement.
Digital RMB: Assessing the benefits—and challenges—of China’s new currency
Figure 1: How CFOs view the use of digital currencies going forward 3. To support operations, MNCs will need
to make major system adjustments
The renminbi’s use as a trading to comply with China’s cybersecurity
currency will substantially increase 6% 16% 40% 34% laws, while protecting their global
over the next 3-5 years
intellectual property and networks from
The euro’s use as a trading compromise or intrusion.
currency will substantially increase 5% 25% 52% 18%
over the next 3-5 years 4. External developments are contributing
Use of digital currencies for transacting considerable uncertainty. China is
business will substantially increase 7% 20% 32% 39%
over the next 3-5 years
tightening its mainland eco-system of
cybersecurity- and other internet-related
0% 50% 100% regulations, while global infrastructure
Strongly disagree Disagree Neutral Agree Strongly agree providers intensify competition and
potentially establish incompatible
Source: CFO Signals, Q4 2020, CFO Program, Deloitte LLP
standards. Both China and the United
States are expanding the scope of
five payments in China. Those licensed Implications for MNCs: Expanded national security concerns and pressing
companies have leveraged their e-payment e-payment market opportunity for localization and domestic ownership
platforms to also become major and highly Centralizing and strengthening the PBOC’s of key networks and platforms. For
profitable providers of a broad range of oversight of electronic transactions example, the State Department’s
financial services, most of which are linked has opened the door for more MNC Clean Network project is rolling out
to electronic payment systems. market participation in e-payment and wide-ranging constraints on digital
related financial services. In the last year, connectivity, targeting China. Current
Since 2017, however, rules bearing on international payment processors and card hybrid arrangements for cross-border
the electronic payment systems’ cash issuers made major progress tapping into payments could see improvements and
management have tightened considerably. China’s enormous domestic e-payments benefits from these new initiatives.
Regulations now require financial services market, either through PBOC-approved
firms to place 100% of their money under acquisitions of domestic payments
management, including wealth management companies or direct arrangements with
products, digital wallets, and retail float, in the NUCC itself. CFOs and executives with
escrow in state-owned enterprise (SOE) treasury responsibilities should consider how
banks. Moreover, in June 2018, the PBOC this enhanced role for international payment
mandated that all third-party payments be providers might serve their growth interests
cleared through China’s NetsUnion Clearing in China.
Corporation (NUCC)―which the PBOC
supervises―pulling back under state control In order to participate in China’s growing
a profitable slice of the electronic payment e-payment marketplace, regulations require
process and providing a new window for the MNCs to use operational platforms that
government to oversee electronic payments are separate from those they use outside
at a highly granular level. Centralizing third- China. They will also need to address four
party payment settlement through NUCC pressure points:
took that role away from the SOE banks
1. Low-cost payment services offered by
and their previous payment clients. The
existing providers mean MNCs will require
moves could mean more streamlined and
efficiencies in order to compete. The two
transparent settlement terms and processes
major domestic digital currency providers
for all parties.
dominate the marketplace and have huge
Taken together, these developments show networks of brick-and-mortar retail and
PBOC support for private sector innovation industrial outlets, as well as a dominant
in providing enhanced financial services presence in online transaction sites.
to the public. According to official reports,
2. Building market share will require creativity,
NUCC will operate only the clearing platform,
effort, and local organizational capability.
leaving electronic payment services to
nonstate retailers.
2
Digital RMB: Assessing the benefits—and challenges—of China’s new currency
FIGURE 5
Potential savings; future possibilities Figure 2: Where are digital assets being embraced?
Digital assets as alternative to or replacement for fiat currencies, by country
Electronic payments, potentially supported In Deloitte’s 2020 Global Blockchain Survey, China and Brazil lead the countries and regions
Brazil, China Mainland, and UAE lead the countries and regions that consider digital assets a
by China’s extensive blockchain investments, that consider
promising digital assets
alternative a promising for
to or replacement alternative to or replacement for fiat currencies.
fiat currencies.
will likely take costs out of current transfer
Percentage of respondents who strongly or somewhat agree that digital assets will be an alternative to
systems. Diversification of payment options or replacement for fiat currencies in the next five to 10 years.
and services innovations could benefit a wide
range of MNCs engaged with China, including China Mainland
retailers, consumer product companies, 94%
financial service companies, and even MNCs Brazil
sourcing in China. Along with lower costs, 94%
expected benefits could include improved
United Arab Emirates
counterparty risk and payment transparency,
90%
which have traditionally created challenges
for MNCs operating in China, as well as Singapore
efficient transaction processing. 86%
Ireland
China’s digital currency program may
85%
eventually impact currency and payments
processing involving cross-border payment Israel
systems and could potentially replace 84%
the SWIFT banking payment system as a
Overall
new global standard. If implementation 83%
regulations allow RMB wallets for overseas
users outside of China, for example, that United Kingdom
would enable a range of direct transfers. 81%
Overseas branches of Chinese state-owned United States
banks are increasing services to MNCs in 81%
countries such as Cambodia, presently using
Germany
SWIFT. Those developing client relationships
81%
could be easily augmented with new payment
systems as they become available, giving Mexico
the Chinese banks a competitive edge. (See 80%
Figure 2 for comparative data on where other Hong Kong SAR
countries are in digital currency investment.) 79%
Of course, there are still hurdles along the Canada
way, many related to current capital controls 76%
and the RMB’s current minor role outside Switzerland
China. Given the PBOC’s regulatory role, 75%
however, its DC/EP initiatives could set the
South Africa
pace for the ongoing evolution of domestic
71%
and international payment systems that
would affect or complement services of Note: N=1,488.
Note: N=1,488.
private providers, other central banks, Source: Deloitte’s 2020 Global Blockchain Survey.
Source: Deloitte’s 2020 Global Blockchain Survey
and incumbent transfers systems. The Deloitte Insights | deloitte.com/insights
first phase of pilots began last spring in
At the same time, there is room for caution. tools. With many questions remaining
four mainland Chinese cities and has since
Direct and indirect transaction costs and about how these digital technologies,
been expanded to nine more cities, while
contracting costs for Chinese subsidiaries central bank-backed digital currencies,
the cross-border rules and regulations are
are concerns for MNCs, especially for cross- and non-sovereign cryptocurrencies
yet to be determined. In parallel, China’s
border transactions. Commercial banks will interact, these moves merit careful
State Administration of Foreign Exchange
are using digital tools, including AI and the attention on the part of executives tasked
is piloting processes for simplified foreign
distributed ledger capability of blockchain, to explore emerging financial management
exchange transactions.
to reduce transaction and contracting costs options to manage costs in an increasingly
and enter into new alliances with major competitive global marketplace.
MNCs to deploy the cost-reducing digital
3Digital RMB: Assessing the benefits—and challenges—of China’s new currency
China’s economy: What’s the view from here?
How do CFOs and economists view Yet, the strength of China’s economy has potential for change. Yet the Biden team
China going into 2021? come with a cost in terms of rising debt. has downplayed the possibility of a swift
Moreover, the government is evidently change in US policy toward China. They
In his “Weekly global economic
keen to avoid the kinds of financial pitfalls prefer to first focus on domestic issues as
update” for January 4, 2021, Ira Kalish,
that often emerge when credit creation is well as solidifying political support before
Chief Global Economist of Deloitte
excessive. For example, the government taking potentially unpopular actions with
Touche Tohmatsu Ltd., wrote: “China’s
is allowing bad corporate debtors to respect to China.”
economic growth continues at a
default on loans and bonds rather than
healthy pace.* Consumer spending For their part, North American CFOs
encouraging lenders to roll over loans.
has been boosted by confidence are more optimistic about China’s
This suggests that the government wants
that the virus is under control. economic outlook than their own. In the
to create a sounder financial base for the
Fixed asset investment has been Q3 2020 CFO Signals report, for example,
coming decade. Although a system of
helped by substantial funding for perceptions of China’s economy exceeded
credit that punishes failure will eventually
state-owned enterprises, as well as those of North America for the first time,
generate more productive investment
regional governments. And exports and the gap widened in Q4. In fact, in
and faster growth, in the short term, it
have performed well, in part owing the latest survey, nearly half cite good
will create disruption.
to China’s global competitiveness in conditions in China now, and 60% expect
technologies for which demand has While the economic outlook for China in better conditions in a year, whereas only
accelerated during the pandemic. 2021 appears positive, one big unknown 18% view North American conditions as
This includes personal protective is the future of the relationship between good, with 59% expecting improvement in
equipment (PPE) and technologies China and the United States. With a a year (see Figure 3).
used for remote interaction. new US administration, there is clearly
*The Chinese economy grew 2.3% last year, according
the country’s National Bureau of Statistics
Figure 3: How CFOs view the Chinese economy
Almost half of North American CFOs view the Chinese economy as good now; 60% expect it to be better in a year
100%
80%
60% 60%
47%
40% 36%
20%
0%
2Q13
3Q13
4Q13
1Q14
2Q14
3Q14
4Q14
1Q15
2Q15
3Q15
4Q15
1Q16
2Q16
3Q16
4Q16
1Q17
2Q17
3Q17
4Q17
1Q18
2Q18
3Q18
4Q18
1Q19
2Q19
3Q19
4Q19
1Q20
2Q20
3Q20
4Q20
1
Good now Better in a year Economic optimism index
1 Indexes reflect the percentage of respondents who rate current economic conditions as “good” or “very good”
and who also expect “better” or “much better” conditions in a year.
Source: Source: CFO Signals, Q4 2020, CFO Program, Deloitte LLP
4Digital RMB: Assessing the benefits—and challenges—of China’s new currency
The combination of these new technology global relevance of the currencies under
tools and more accommodating regulations its management, as well as to enhance
are also likely to improve risk mitigation the appeal of its commercial global service
and capital flows. For example, automated offerings and those of China’s huge, SOE
processes are being deployed in finance banks. It will be essential for CFOs to stay
to reduce transaction costs and improve on top of the many complex and fast-
key finance activities, including settlement moving developments involving digital
of receivables and payables, reconciliation, currencies, especially the services that
forecasting, and monitoring. major international commercial banks
are developing with these new and
The PBOC’s attention to digital currencies important tools.
and electronic transactions signals that
the central bank itself is counting on these
technology developments to expand the
Contacts
Joe Guastella Ken DeWoskin
Principal; Americas leader of the Independent senior advisor to the
Deloitte Chinese Services Group Chinese Services Group
Deloitte Consulting LLP Deloitte Consulting LP
jguastella@deloitte.com kedewoskin@deloitte.com
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