MNI EXCLUSIVE: Digital Yuan May Pave Way For Chinese SWIFT

--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.

     --NEGATIVE RATES

     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

Tang.

     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

tapping.

     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: jason.webb@marketnews.com

[TOPICS: MMQPB$,M$A$$$,M$Q$$$,MT$$$$,MX$$$$,MGQ$$$]