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Digital RMB: Assessing the Benefits—And Challenges—Of China's New CFO Insights January 2021 Digital RMB: Assessing the benefits—and challenges—of China’s new currency Throughout last year, China reported The possibilities are not lost on CFOs. In important implication of DC/EP for MNCs substantial progress on its digital renminbi fact, in Q4 2020 CFO Signals report, almost concerns changes to China’s electronic (RMB) and electronic payment system 40% of respondents expect the RMB’s payment capabilities and usage. Chief (DC/EP), and is now testing it in a growing use as a trading currency to increase, and among those is greatly enhancing the number of cities. And as these new 41% expect digital currencies for business ability of the People’s Bank of China’s capabilities are introduced and evolve, CFOs transactions overall to rise (see Figure 1). (PBOC) to monitor payments and clearing at multinational companies (MNCs) have a And in this issue of CFO Insights, we’ll discuss data, which will strengthen its ability to fight leading role to play in understanding how to both the introduction and evolution of fraud, illegal foreign exchange transactions, help capture value from them. electronic payments in China, as well as the tax evasion, and capital flight. implications for MNCs going forward. First, combined with the government’s China’s ruling party has long focused on recent moves to regulate the country’s Timeline: Diversification of electronic direct control over financial services as a dominant e-payment processors, the DC/ payments major lever for economic management, EP could help MNCs make inroads into the While a great deal of attention has been with just a couple of dominant e-payment country’s large and growing e-payment devoted to China’s digital RMB―which will systems receiving regulatory approval and market. In addition, the initiative could be an electronic form of money (cash in accommodating banking licenses as far back potentially reduce MNCs’ business risks circulation) that official reports claim will as 2011. Mobile transactions reached $49 caused by the complexity and costs of both eventually replace paper currency―an trillion in 2019, accounting for four of every domestic and cross-border settlement. Digital RMB: Assessing the benefits—and challenges—of China’s new currency Figure 1: How CFOs view the use of digital currencies going forward 3. To support operations, MNCs will need to make major system adjustments The renminbi’s use as a trading to comply with China’s cybersecurity currency will substantially increase 6% 16% 40% 34% laws, while protecting their global over the next 3-5 years intellectual property and networks from The euro’s use as a trading compromise or intrusion. currency will substantially increase 5% 25% 52% 18% over the next 3-5 years 4. External developments are contributing Use of digital currencies for transacting considerable uncertainty. China is business will substantially increase % 20% 32% 39% tightening its mainland eco-system of over the next 3-5 years cybersecurity- and other internet-related 0% 50% 100% regulations, while global infrastructure Strongly disagree Disagree Neutral Agree Strongly agree providers intensify competition and potentially establish incompatible Source: CFO Signals, Q4 2020, CFO Program, Deloitte LLP standards. Both China and the United States are expanding the scope of five payments in China. Those licensed Implications for MNCs: Expanded national security concerns and pressing companies have leveraged their e-payment e-payment market opportunity for localization and domestic ownership platforms to also become major and highly Centralizing and strengthening the PBOC’s of key networks and platforms. For profitable providers of a broad range of oversight of electronic transactions example, the State Department’s financial services, most of which are linked has opened the door for more MNC Clean Network project is rolling out to electronic payment systems. market participation in e-payment and wide-ranging constraints on digital related financial services. In the last year, connectivity, targeting China. Current Since 2017, however, rules bearing on international payment processors and card hybrid arrangements for cross-border the electronic payment systems’ cash issuers made major progress tapping into payments could see improvements and management have tightened considerably. China’s enormous domestic e-payments benefits from these new initiatives. Regulations now require financial services market, either through PBOC-approved firms to place 100% of their money under acquisitions of domestic payments management, including wealth management companies or direct arrangements with products, digital wallets, and retail float, in the NUCC itself. CFOs and executives with escrow in state-owned enterprise (SOE) treasury responsibilities should consider how banks. Moreover, in June 2018, the PBOC this enhanced role for international payment mandated that all third-party payments be providers might serve their growth interests cleared through China’s NetsUnion Clearing in China. Corporation (NUCC)―which the PBOC supervises―pulling back under state control In order to participate in China’s growing a profitable slice of the electronic payment e-payment marketplace, regulations require process and providing a new window for the MNCs to use operational platforms that government to oversee electronic payments are separate from those they use outside at a highly granular level. Centralizing third- China. They will also need to address four party payment settlement through NUCC pressure points: took that role away from the SOE banks 1. Low-cost payment services offered by and their previous payment clients. The existing providers mean MNCs will require moves could mean more streamlined and efficiencies in order to compete. The two transparent settlement terms and processes major domestic digital currency providers for all parties. dominate the marketplace and have huge Taken together, these developments show networks of brick-and-mortar retail and PBOC support for private sector innovation industrial outlets, as well as a dominant in providing enhanced financial services presence in online transaction sites. to the public. According to official reports, 2. Building market share will require creativity, NUCC will operate only the clearing platform, effort, and local organizational capability. leaving electronic payment services to nonstate retailers. 2 Digital RMB: Assessing the benefits—and challenges—of China’s new currency FIGUE 5 Figure 2: Where are digital assets being embraced? Potential savings; future possibilities Digital assets as alternative to or replacement for fiat currencies, by country Electronic payments, potentially supported In Deloitte’s 2020 Global Blockchain Survey, China and Brazil lead the countries and regions Brail, China Mainland, and UAE lead the countries and regions that consider digital assets a by China’s extensive blockchain investments, thatpromising consider alternative digital assets to or replacement a promising foralternative fiat currencies. to or replacement for fiat currencies. will likely take costs out of current transfer Percentage of respondents who strongly or somewhat agree that digital assets will be an alternative to systems. Diversification of payment options or replacement for fiat currencies in the next five to 10 years. and services innovations could benefit a wide range of MNCs engaged with China, including China Mainland retailers, consumer product companies, 4 financial service companies, and even MNCs Brazil sourcing in China. Along with lower costs, 4 expected benefits could include improved United Arab Emirates counterparty risk and payment transparency, 90% which have traditionally created challenges for MNCs operating in China, as well as Singapore efficient transaction processing. 86% China’s digital currency program may Ireland eventually impact currency and payments 85% processing involving cross-border payment Israel systems and could potentially replace 4 the SWIFT banking payment system as a Overall new global standard. If implementation 3 regulations allow RMB wallets for overseas users outside of China, for example, that United Kingdom would enable a range of direct transfers. 1 Overseas branches of Chinese state-owned United States banks are increasing services to MNCs in 1 countries such as Cambodia, presently using Germany SWIFT. Those developing client relationships 1 could be easily augmented with new payment systems as they become available, giving Mexico the Chinese banks a competitive edge. (See 80% Figure 2 for comparative data on where other Hong Kong SAR countries are in digital currency investment.) 79% Of course, there are still hurdles along the Canada way, many related to current capital controls 76% and the RMB’s current minor role outside Switzerland China. Given the PBOC’s regulatory role, 75% however, its DC/EP initiatives could set the pace for the ongoing evolution of domestic South Africa 1 and international payment systems that would affect or complement services of Note:Note: N1,488.N=1,488. private providers, other central banks, Source: Deloitte’s 2020 Global Blockchain Survey. Source: Deloitte’s 2020 Global Blockchain Survey and incumbent transfers systems. The Deloitte Insights deloittecominsights first phase of pilots began last spring in At the same time, there is room for caution. tools. With many questions remaining four mainland Chinese cities and has since Direct and indirect transaction costs and about how these digital technologies,
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