“The digital RMB is directly pegged to the fiat RMB.But unlike the fiat RMB, the digital RMB will be freely convertible on international exchanges.”
I don't think there is any way to wall off DCEP and fiatRMB. If fiat RMB is freely convertible to DCEP, and then able to be converted to other currency, then there is no difference between allowing DCEP to be freely convertible and normal RMB to be freely convertible (and all the issues, such as capital flight and currency appreciation that comes with it).
If digital RMB is not freely convertible (e.g. limited to foreigners), then I don't see how it will have a base big enough to support internationalization, as foreigners will have no interest in holding DCEP. Foreigners won’t be using it for trade between non-China counterparts, and for trade with Chinese counterparts, they will want to convert to the native currency which will then have to be done by China's central bank and dip into China'sforeign exchange reserves. e.g., if that is the case, then it is pretty much just settling everything in foreign currency.
Let me know if I missed something, but I just don't see how DCEP and normal RMB can have different policies and outcomes.
Hi Leon, thanks for pointing this out and I think you're right. I'll double-check to understand this more and I'll issue a correction in today's notes. It looks like DCEP isn't necessarily freely convertible with all reserve currencies, but rather would be freely convertible with currencies that have bi-lateral currency swap arrangements with specific countries. For example, this would be useful for Belt and Road investments where China could try to finance these projects with DCEP or at least encourage BRI countries to use DCEP in other ways.
Thanks again for mentioning this because it's an important point. Like I said I'll make this correction in today's notes!
Hi Kevin,
“The digital RMB is directly pegged to the fiat RMB.But unlike the fiat RMB, the digital RMB will be freely convertible on international exchanges.”
I don't think there is any way to wall off DCEP and fiatRMB. If fiat RMB is freely convertible to DCEP, and then able to be converted to other currency, then there is no difference between allowing DCEP to be freely convertible and normal RMB to be freely convertible (and all the issues, such as capital flight and currency appreciation that comes with it).
If digital RMB is not freely convertible (e.g. limited to foreigners), then I don't see how it will have a base big enough to support internationalization, as foreigners will have no interest in holding DCEP. Foreigners won’t be using it for trade between non-China counterparts, and for trade with Chinese counterparts, they will want to convert to the native currency which will then have to be done by China's central bank and dip into China'sforeign exchange reserves. e.g., if that is the case, then it is pretty much just settling everything in foreign currency.
Let me know if I missed something, but I just don't see how DCEP and normal RMB can have different policies and outcomes.
Hi Leon, thanks for pointing this out and I think you're right. I'll double-check to understand this more and I'll issue a correction in today's notes. It looks like DCEP isn't necessarily freely convertible with all reserve currencies, but rather would be freely convertible with currencies that have bi-lateral currency swap arrangements with specific countries. For example, this would be useful for Belt and Road investments where China could try to finance these projects with DCEP or at least encourage BRI countries to use DCEP in other ways.
Thanks again for mentioning this because it's an important point. Like I said I'll make this correction in today's notes!
- Kevin