China's digital renminbi is picking up pace. The e-CNY has had Chinese renminbi (RMB) 7 trillion (US$987 billion) in cumulative transactions since launching in 2020, making it the biggest central bank digital currency (CBDC) in the world, according to the Atlantic Council, a U.S. think tank. And the next two to three years should see greater deployment, with attendant pros and cons. For Chinese corporates, its growing usage may trim costs and improve international payment efficiency; for banks, it could erode fee revenue.

In our view, developments are currently emerging more rapidly on the wholesale and cross-border settlement fronts for e-CNY. The growing ties between Saudi Arabia and China, for example, suggest growing potential in trading of goods and services between these trading partners.

We view e-CNY applications on the retail front as unlikely to replace popular consumer apps like Alipay and WeChat Pay for retail purposes, at least in the next few years. These so-called super apps are well-entrenched and will continue to compete with banks on the retail front.

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Wholesale Application Could Level The Playing Field In Cross-Border Transactions

In our view, the e-CNY is likely to enhance cost efficiencies for corporates and could incentivize incremental cross-border transactions in CBDCs. E-CNY has increasingly spread from its origins in retail use to wholesale applications both domestically and cross-border.

We anticipate that China's participation in mBridge, a pilot, will have a meaningful effect on the country's cross-border digital currency application. mBridge is a wholesale multi-CBDC payment platform that involves central banks from China, Hong Kong, Thailand, the United Arab Emirates (UAE), and Saudi Arabia. It uses central bank money and aims to save costs and time by allowing direct transactions between payer and recipient banks, without other financial intermediaries. The pilot entered the minimum viable product stage in May 2024, suggesting broader uses in the future. The Bank for International Settlements will gradually phase out from the initiative after its establishment at this stage.

In addition to efficiency gains, participation in the mBridge system could help corporate China reach a more equitable system of cross-border payments, compared with the current banking-dominated model. While the governance structure and details of this platform are not yet public, we anticipate the system will operate according to protocols agreed upon by participating jurisdictions.

We expect the novel payment platform could boost payment flexibility and reduce foreign exchange rate risk for corporates. mBridge supports the use of home currencies of the payer or of the recipient in the form of CBDC. This is subject to the counterparties' willingness to accept the currency for payment.

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The biggest energy importer, China, and two of the biggest energy exporters, Saudi Arabia, and UAE, could find this platform a cost-efficient way to settle their energy trades and other infrastructure-related transactions. Increased cooperation between Saudi Arabia and China may also facilitate renminbi-based oil trade and support use of e-CNY. Before joining mBridge in June 2024, Saudi Arabia settled crude oil trade in digital renminbi (see appendix).

The mBridge System Faces Operational Obstacles

Wider use of e-CNY does present operational challenges. The mBridge system aims to facilitate technical interoperability with participating jurisdictions' domestic financial infrastructure. It still needs to be tested on how the international CDBC platform aligns with regulatory and governance frameworks across jurisdictions. The confidence of participating corporates in the platform will also be crucial to its success.

Other practical tests include the Chinese financial system's potential vulnerability to cyber risks and IT system issues arising from the new payment vehicle. A recent cyber attack on the U.S. unit of the Industrial and Commercial Bank of China Ltd. highlights the difficulty in managing cyber risks.

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Chinese Banks To Bear Financial Burden In e-CNY Rollout

The increasing use of digital renminbi could have a moderately negative impact on Chinese banks. This is particularly the case if the transaction volume jumps--most likely because of wholesale applications. Chinese banks stand to lose a portion of settlement fee income from payment transactions. Currently, banks do not charge fees in e-CNY transactions domestically.

We view these transactions as off-bank account and akin to assets under management. Furthermore, the e-CNY's public service function as a cash-equivalent limits bank charges. We expect Chinese banks' fee charges for cross-border e-CNY transactions would also be lower than current rates, depending on the use of mBridge. This is in part due to the reduction of intermediaries and introductory promotions.

In our view, Chinese banks have reasonable revenue profiles to absorb such a hit. As of 2023, gross settlement fees from various services, accounted for only about 5.0% of bank profit before tax and 2.7% of pre-provision profit, according to the financial disclosures of the country's top 30 banks. The impact on net fees relating to correspondent bank services is likely to be at a lower and more manageable level.

We anticipate Chinese lenders could utilize e-CNY as touchpoints to develop incremental business relationships with customers, depending on banks' business capabilities. Direct data mining and cross-selling of banking products via e-CNY applications could be somewhat limited at this stage. On the retail banking side, tightened customer privacy control may limit certain cross-selling opportunities when compared with traditional bank cards and third-party payments.

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Meanwhile, Chinese banks are likely to increase investments in fintech to advance their digital renminbi operations. This includes investments in risk management and the development of an e-CNY digital wallet. Chinese megabanks and joint-stock banks have increased their fintech investments to 3%-5% of revenues as of 2023 from 2%-3% five years ago. They've continued to digitalize their banking operation systems and offered incremental applications in part to compete with big tech.

Policymakers To Ensure Financial Stability, Reap Policy Benefits

Stability of the financial system will remain paramount to Chinese authorities and regulators, and they will rein in unintended disruptions stemming from the rollout of the digital renminbi, in our view. This is in keeping with the tighter regulatory supervision on fintech.

Meanwhile, the addition of e-CNY to China's abundance of digital payment methods is unlikely to dampen the funding base of the country's banking system. The interest-free feature e-CNY should act to dissuade depositors from transferring large amounts of funds from banks to non-interest-bearing digital cash, unless it is for transactional purposes. Further mitigating factors include transaction limits and the People's Bank of China's (PBOC) monitoring of fund flows. As of 2023, demand accounts yielded about 0.2%-1.2% for individuals and corporates deposited with Chinese megabanks.

Other characteristics of e-CNY may also benefit the country's financial system. Live feeds of e-CNY transactional data could strengthen anti-money laundering and counter-terrorist financing, among other financial crimes. Incremental transactional data may also be used to inform macroeconomic policies such as domestic consumption.

The steady advance of China's digital renminbi transactions may test traditional payment structures and hit Chinese banks' revenues, but the broader implications for the Chinese banking sector's credit profiles will remain limited, in our view.

Appendix: Key Developments In China's e-CNY

Since the launch of the digital renminbi in 2020, China has been widening its scope via a two-tier operational system--namely the PBOC issues, redeems and manages e-CNY, and commercial banks carry out exchange with public and business applications.

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As of August 2024, 71 banks in China have participated in the initiative. This includes six megabanks, 10 joint-stock banks, two digital-only banks, and 53 regional and foreign banks. E-CNY is now circulated in certain regions of 17 provinces and cities. China also leverages state-owned banks' global network to pilot cross-border e-CNY retail and wholesale transactions.

Writer: Lex Hall

Related Research

• Saudi-China Ties And Renminbi-Based Oil Trade, Aug. 20, 2024
• Tech Disruption In Retail Banking: Country-By-Country Analysis 2023, Sept. 27, 2023
• The Future Of Banking: Central Bank Digital Currencies In Asia-Pacific--Pathways Are Plenty, Destination Is Uncertain, Oct. 5, 2021
• The Future Of Banking: China's Digital Renminbi Could Hit Payment Platforms, Nov. 11, 2020