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China tech

China sets trial run for digital yuan in top city hubs

Shanghai, Beijing, Guangzhou and Hong Kong added to pilot project amid US tensions

QR codes for shoppers to use to pay with the mobile phone apps Alipay and WeChat Pay are ubiquitous in China.     © Reuters

HONG KONG -- Chinese authorities will expand test use of the country's prototype digital currency across the nation's three leading urban clusters centered on Beijing, Shanghai and the southern cities of Guangzhou, Shenzhen and Hong Kong.

The move, announced by the Ministry of Commerce, expands the coverage area for testing the cyber currency to a potential user base of around 400 million, or 29% of the country's population. It has been trialed since April in four cities with a combined population of 41 million,

Work on the digital yuan, which is intended to be interchangeable with the country's paper currency, started more than five years ago but accelerated after Facebook unveiled its Libra digital currency project in June 2019. Rising concerns that the U.S. could try to throttle China's access to the global dollar-based financial system, amid mounting tensions between Washington and Beijing, have fed further interest in the effort.

"The digital yuan as a competitor of the greenback is more of a long-term phenomenon," said Andrew Collier, managing director of financial research company Orient Capital Research in Hong Kong.

"Digitalization doesn't address the lack of free convertibility of the yuan," he said. "However the digitalization of the currency and other settlement systems gives an advantage to its (China's) institutions, which will be significant when the currency is liberalized."

Some analysts have speculated that China could eventually use the digital yuan, known as the digital currency electronic payment system, in cross-border transactions, potentially bypassing the Swift global interbank network dominated by the dollar.

The People's Bank of China, the central bank, has chosen a two-tier approach under which it will issue the digital currency to commercial banks and institutions, which will then distribute it to the general public. According to a report in China's 21st Century Business Herald newspaper last week, a number of major state-run commercial banks have begun large-scale internal testing of a digital wallet application for use with the virtual yuan.

The central bank intends the digital yuan to provide a safeguard against overreliance on alternative electronic payment systems. Ant Group's Alipay and Tencent Holdings' WeChat Pay control 96% of China's mobile payments market.

In April, the PBOC's digital currency institute said it had started closed trials of the digital yuan in Shenzhen, Chengdu, the city of Suzhou near Shanghai and the Xiongan new economic zone south of Beijing. It also said it intended to pilot the system at venues involved with the 2022 Beijing Winter Olympics.

Friday's announcement extends pilot use to the Beijing-Tianjin-Heibei Province region, the Yangtze River Delta area around Shanghai and the south's Greater Bay Area which includes Macao. It suggested other central and western areas may take part too. Last month, ride-share platform Didi Chuxing said it also would partner with the PBOC.

Additional reporting by Nikkei staff writer Grace Li.

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