China finds itself in a strong position to release its central bank digital currency, the eCNY, following successful trials. The completion of the eCNY trials coincides with the rollout of the Covid-19 vaccine, and now that countries can ease travel restrictions and the hard-hit tourism industry can recover, China’s outbound tourism could become a catalyst for the global usage of the eCNY. This could become a defining moment for the internationalization of China’s currency, the renminbi, with a small chance of strengthening it enough to even begin challenging the U.S. dollar as the top global currency.
Since the 2008 Global Financial Crisis, China has worked to increase the overseas usage of the renminbi, especially as a means of challenging the dollar’s dominant position in international trade and finance. Despite consistently promoting the renminbi, China has faced significant hurdles in internationalization, particularly because of its strict currency controls. Importantly, the trade financing of Asian supply chains remains mostly in dollars, comprising approximately 80 percent of Asian banks’ international activities in the third quarter of 2019.
Meanwhile, to bolster China’s already strong currency regulation, the People’s Bank of China (PBoC, China’s central bank) developed the eCNY. Due to the PBoC’s oversight of the eCNY, it has the power to both monitor macroeconomic trends and manage the renminbi more directly.
Because the eCNY is more efficient and convenient to use compared to existing physical currencies like the dollar, it could also compete against the dollar’s dominance in global transactions if the PBoC permits its usage externally. It may even balance China’s desire for strict currency supervision and renminbi internationalization, although this depends on if foreign authorities become concerned with the PBoC’s data collection through the eCNY and the extent to which they may curtail its usage.
Nonetheless, outbound Chinese tourists will likely want to continue using the eCNY abroad, which could become a vector for its acceptance overseas, even in a limited capacity. While the Chinese government declared its interest in launching the eCNY during the 2022 Beijing Winter Olympics, a more likely driver for encouraging its global usage will be outbound Chinese tourism. In fact, Chinese tourism is the biggest tourism sector of any country in the world. Moreover, the Chinese government is already aware of the advantage it has with its tourism industry and has even leveraged it as a coercive economic tool against Taiwan by restricting Chinese tourism there. Such restrictions could be used against other countries in the region with large numbers of Chinese tourists if they refuse to accept the eCNY.
Consequently, China has an opportunity to use the upcoming recovery of the Chinese tourism industry to promote the eCNY in foreign local payment systems. Notably, some tourist vendors that interact with many Chinese tourists already use Alipay to encourage further spending. Given Alipay and WeChat’s potential future role as distributors of the eCNY in China, the PBoC could extend the eCNY’s usage abroad through the same payment apps.
If the PBoC approves the external usage of eCNY, Southeast Asia will probably accept the eCNY faster due to their existing reliance on outbound Chinese tourism. Given Europe’s own growing reliance on Chinese tourism, they may similarly accept using eCNY. This would greatly enhance China’s financial influence in Southeast Asia and Europe through the renminbi’s increased usage, potentially cutting into the dollar’s present dominance.
In 2019, the population of outbound Chinese tourists peaked at 170 million, with the most popular destinations being Thailand, Japan, and Korea (10 million, 8.14 million, and 5.51 million respectively). In the same year, Chinese tourism grew significantly in Europe.
Outbound Chinese tourism is especially economically significant in Southeast Asia. In Thailand, tourism comprised 10 percent of its 2019 GDP, with the Philippines topping it at a staggering 12 percent of its 2019 GDP. As Chinese tourists comprised at least 20 percent of the tourism population of several Southeast Asian countries, their spending is an important income source for foreign vendors. Accordingly, if a Chinese payment provider offers a more efficient payment method, foreign vendors will have a strong incentive to adopt a payment infrastructure compatible with it.
Currently, there are already joint ventures in several Asian countries between existing Chinese payment providers, like Ant Financial (Alipay) and Tencent (WeChat pay), and local subsidiaries. Yet, these subsidiaries are not directly linked to payment provider accounts in China, instead of using existing correspondent banking relationships to bridge foreign payment systems and China-based Alipay or WeChat payment networks. As a result, Chinese tourists can pay in renminbi while their money is transferred to foreign accounts in the local currency.
By ensuring that Chinese tourists’ overseas payments reach the foreign vendor, eCNY’s presence in the retail sector could increase the use of the renminbi in cross-border transactions. If the eCNY manages to challenge the dominance of the USD in global transactions in the medium-term, it could be another arena in U.S.-China strategic competition as the dollar’s relative decline would erode U.S. financial influence.
Such strategic friction will only increase if more U.S. allies accept the usage of the eCNY by outbound Chinese tourism. The United States must therefore coordinate with allies to formulate a multilateral response to the eCNY rollout and the leverage China wields with its outbound tourism. This could include highlighting the impact of the eCNY’s data collection capabilities eCNY on personal privacy with the U.S. private sector and allies. In turn, the United States could lead the development of a set of international norms on CBDCs and protections of personal privacy to lessen the impact of a globally used eCNY.
Francis Shin is a master’s student in International Affairs at the Graduate Institute of International and Development Studies in Geneva. In 2020 he served as the Joseph S. Nye Jr. research intern in the Energy, Economics, and Security Program at the Center for a New American Security (CNAS).