China's digital currency

Author: Forex Live | Category: Education

How is a digital yuan shaping up to be

In China, nearly 86% of payments are now digital, occurring mostly via mobile phones. The whole transaction happens with a click of a button, a fingerprint scan, or even using facial recognition. The digital Yuan is not a cryptocurrency, instead it is issued and managed by the Chinese central bank just like its fiat currency.

China's Early Adopters

Still in its early stages and trials, the digital currency has one reason to exist, to create a cashless future. The difference between the digital currency and current electronic payments is that this currency will be directly transferred in or out of your electronic banking wallet, unlike the traditional e-banking system where an individual's funds get deducted from his/her account value. On another note, a digital currency does not need to have paper banknotes to back up its true "theoretical" value, however a digital Yuan will be virtually created.

Economic Impact

Chinese economists are analyzing how the digital currency can affect their rising economy. The possible economic consequences of using digital money are shifting global investments, eliminating the "middlemen", encouraging overseas transactions, and removing the barriers to entry on international businesses. The inauguration of a digital Yuan will undoubtedly affect the banking industry and its underlying operations because it aims at excluding many financial intermediaries from a transaction. The Chinese virtual currency is expected to account for nearly 16% of all consumption transactions in the upcoming years. The main advantages a digital currency imposes are increasing the speed of domestic and international transactions and reducing the costs of these transactions. Global trade transactions will occur much faster and will save the hidden costs and burdens associated with traditional transfers. This in fact will boost global trade and remove the barriers of entry on creating global businesses that can work together remotely, as any transaction will be fast, transparent, and secure. While a digital currency is desirable to many, it also imposes many risks on our current operating models in many industries. For instance, there are many concerns on data control, privacy, operational risk, and regulation. Cybercriminals are more drawn to act on digital currencies and hack electronic wallets due to its virtual characteristics, vulnerable identity, and lack of security and regulations. China is addressing and dealing with these factors now to secure its citizens and monetary system.

US & China Impacts

There are several factors that affect the value of a currency relative to other major currencies. A digital Yuan might highly be affected by the ongoing US - China trade war. If more sanctions come into play, the initiation and management of such a digital currency might be non-viable with stricter sanctions coming from the US. Although a Biden administration will not end the trade war completely, it would still give the Chinese central bank much ease to create and succeed with its digital Yuan.

What does it mean for Investors?

Traders and investors are overwhelmed with the idea of how a changing monetary system might affect the current financial market. In fact, a virtual currency will probably be an important milestone to the development of capital markets. Due to the ease of transacting the currency, liquidity will surely increase across all markets which in fact is associated with less risk, as there will be more participants willing to take the opposite side of your trade. This attracts more speculators and traders to the field, which unquestionably adds value to the current market conditions. A possible trading opportunity would be to go long on the Yuan, as China is exerting its strongest efforts to challenge the US dollar for financial supremacy.

In Summary

Thus, despite if the digital currency comes out soon or not, cash will not disappear for the short term. The decision to replace paper cash with a digital one is a market choice more than a government ordinance. A virtual currency will surely allow for more individual freedom and seems more relevant to investors and businesses. Ultimately, the rise of the Yuan will serve China well, as faster global transactions and lower fees will aid emerging markets to develop and prosper for the long term.

This article was submitted by Royal.
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