China Could Use Digital Yuan to Promote Capital Convertibility

China could use the digital yuan in a cross-border “regulatory sandbox” program to test capital account convertibility between Shenzhen and Hong Kong, according to a proposal by a senior central bank official.

Authorities could “explore allowing market entities with strong demand for cross-border financial services and controllable risks to use the digital yuan as a carrier in the pilot program of capital account convertibility” between the two cities, Xing Yujing, director of the People’s Bank of China’s Shenzhen branch, in an interview with Xinhua-affiliated Outlook Weekly.

The interview was first published on the magazine’s website on May 25 and later reposted by the State Administration of Foreign Exchange’s Shenzhen branch on May 31.

The program could help accelerate the promotion of capital account convertibility and the internationalization of yuan, she said in the interview. Risks can be effectively prevented and controlled using the smart contract of the digital yuan and the real-time transaction data monitoring function, she said.

The PBOC and Hong Kong Monetary Authority have already conducted successful cross-border testing of the digital yuan and authorities are looking to now expand the program.

Another PBOC official also recently highlighted the important role that the digital yuan can play in advancing China’s push for yuan internationalization. Zhu Jun, head of the central bank’s international department, said in an article last month that China faces an “important window” to promote global use of the yuan as risks of U.S.-China decoupling in trade, technology and investment threatens to spread to the area of finance.

She said China “should take advantage of the early progress” in the digital yuan’s development to explore potential areas for internationalization.

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