Tribune. China is about to take a new step in the deployment of the digital yuan. It has been tested in four pilot cities since April 2020, with success. In the coming weeks, two of the country’s main public banks, the China Construction Bank and the Bank of Communications, will offer their clients to use the digital yuan to purchase investment funds and insurance products.
If the operation is successful, it should further expand the use of China’s virtual currency, which has so far remained confined to payments for purchases of low-value goods and services.
The goal set by the Chinese Communist Party during the 14e five-year plan covering the period 2021 to 2025 is to deepen research and development in the field of digital currencies and to allow the widest possible deployment of its state digital currency. This deployment, however, poses significant risks to China’s financial stability.
Small banks outside of digital
The immediate risk is that of the destabilization of rural banks. China has more than 1,600 small, rural banks with low capital. The economic crisis resulting from the pandemic has weakened them. Their net profit growth was zero in the first half of the year.
In addition, rural banks have had to fund large sums following an increase in non-performing loans in recent months. More than 30% of the loans they grant are to the sectors which have been most penalized by the crisis, the manufacturing sector and the construction sector.
The deployment of the digital yuan risks accentuating their difficulties. The Chinese government does not plan to rely on the dense network of rural banks to expand the use of virtual currency and promote financial inclusion. In China, 20% of the population is unbanked, particularly in the countryside. Small rural banks should stay out of the system, making it impossible to convert their deposits into digital yuan.
A risk of destabilizing the banking system
It is the large state-backed banks, in partnership with telecommunications companies which are present throughout the country, which should be responsible for encouraging the Chinese to use the digital yuan with great promotions and incentives. financial.
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