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--Digital Currency May Allow China To Challenge SWIFT
--Could Facilitate Negative Rates
     BEIJING(MNI) - China's experimental digital currency could eventually allow
more precise monetary policy and boost international use of the yuan,
challenging established cross-border payment systems such as SWIFT, policy
advisors told MNI, adding that its design will aim not to sap deposits at
commercial banks or reduce their capacity to lend.
     Fast and secure, the Digital Currency Electronic Payment system currently
on trial in four cities and soon to be extended to the whole country, will also
boost cross-border settlement speeds, according to Pan Helin, executive director
of Digital Economy Research Institute under Zhongnan University of Economy and
Law. This could potentially enable China to construct rivals to networks such as
the Society for Worldwide Interbank Financial Telecommunication and the
Clearinghouse Interbank Payments System (CHIPS), if foreign partners,
particularly in emerging markets, adopt the technology.
     China is increasingly reluctant to rely solely on international payment
systems dominated by the U.S., Pan added.
     The universal use of electronic money could also add to the PBOC's monetary
toolkit, according to Dong Ximiao, a special researcher with the National
Institution of Finance and Development, who said the government hopes DC/EP will
eventually replace cash.
     Setting negative interest rates becomes more effective when savers do not
have the option of withdrawing money to stockpile physical notes, and access to
real transaction data would allow the central bank to adjust interest rates and
other policy tools more efficiently, said Tang Weijian Chief Macroeconomics
Analyst in the Financial Research Center of Bank of Communications, one of the
biggest state-owned commercial banks.
     Mindful of the danger of draining the banking system of deposits,
restricting the flow of credit, the PBOC does not pay interest on the digital
currency. Instead, users can opt to deposit it in interest-bearing accounts in
commercial lenders, which will continue to create money via fractional reserve
banking, according to Zou Chuanwei, the chief economist with Wanxiawng
Blockchain and a former visiting scholar at the PBOC's Financial Institute.
     The central bank may also in future require commercial banks to charge
conversion fees to people transferring funds to their digital wallets, said
     Unlike Bitcoin and other virtual currencies, DC/EP is state backed. It
works by charging a phone app with digital yuan, which can be used to pay by
     In contrast to other payment apps such as the Wechat and Alipay digital
payment systems already very popular in China, transactions can take place
without internet connections, and DC/EP does not require users to have
commercial bank accounts, with the PBOC adjusting transaction balances itself,
making it more cash-like.
     DC/EP would even make dealing with bank runs easier as lenders which come
under pressure would not run the risk of running out of paper money and having
to wait for fresh deliveries to cope with panic withdrawals, Dong added.
--MNI London Bureau; +44 203 865 3829; email:
[TOPICS: MMQPB$,M$A$$$,M$Q$$$,MT$$$$,MX$$$$,MGQ$$$]

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