China has kicked off a trial for cross-border payments using central bank digital currencies (CBDCs) with Saudi Arabia and other partners, eyeing alternative uses for the digital yuan amid its struggles in the home market.
Other participants include Hong Kong, Thailand, and the UAE. The International Monetary Fund and other organizations are also taking part as observers.
CBDCs use blockchain technology to record transactions. They can allow cross-border payments to be completed within seconds and cut costs by up to 50%, according to the People’s Bank of China (PBOC).
PBOC deputy governor Lu Lei said in September that the central bank wanted to promote interconnectivity in global financial infrastructure under a multilateral framework. The new trial aims to find solutions to issues that arise in cross-border settlements, Lu said.
Currently, international payments pass through so-called correspondent banks based on orders placed via the SWIFT messaging platform. The process can take a few days to about a week.
Cross-border payments are also typically made in dollars. Low-cost transfers using CBDCs could help promote non-dollar transactions and curb China’s dependence on the dollar.
In light of China’s progress in the field, seven central banks—including in Japan, the US, and Europe—also announced a joint trial for CBDC payments in April with private sector partners.
China “aims to take a leading role in creating new technologies and standards for next-generation transactions,” said Naoki Tsukioka of Mizuho Research & Technologies.
The new trial comes as the digital yuan face headwinds at home.
The PBOC launched a research group in 2014 toward launching the digital yuan, eyeing its use in China’s retail sector. The idea was for commercial banks to launch digital wallets that could be used for payments at restaurants and other stores by scanning a code.
The first pilot program kicked off in October 2020 in Shenzhen. Access has since been expanded to 26 areas across 17 provinces and municipalities.
China has also experimented with using the digital yuan for salary and tax payments. Digital yuan transactions totaled RMB 7 trillion yuan (USD 992 billion) at the end of June, according to the PBOC.
Still, there is no clear path for its full-scale launch. The Communist Party Central Committee vowed “steady progress” in the research, development, and application of the digital yuan in a July resolution but did not lay out any specific steps.
Part of the challenge is that Chinese users see little advantage to the digital yuan over popular private sector payment apps, such as WeChat Pay and Alipay. More than 80% of payment transactions in China are already cashless, the Payments Japan Association has estimated.
“I used the digital yuan during a pilot, but it’s basically the same thing as WeChat Pay and other platforms,” a restaurant worker in Beijing said.