Digital yuan poised to shake up commodity trade with Hong Kong

abdelaziz Fathi

China’s pilot program for its central bank digital currency (CBDC), known as the digital yuan, is taking a leap forward with its integration for settling commodities and services transactions with Hong Kong.

digital yuan

This prospective move was unveiled by Di Gang, the Digital Currency Institute’s deputy director-general, at the Hong Kong Fintech Week.

The news comes as Hong Kong is gearing up to test the integration of China’s digital yuan with its domestic Fast Payment System (FPS). This initiative, announced by officials earlier in October, marks the second phase of the e-CNY trials in the financial center.

China’s e-CNY stands out as one of the most advanced central bank digital currency (CBDC) projects among the world’s major economies. While the initial focus of the project is domestic, cross-border trials in Hong Kong have been gaining momentum.

Amidst discussions at the prominent Asian finance conference, Di highlighted that collaboration between the mainland and Hong Kong could open doors to settling payments for natural resources like natural gas and oil, alongside other services, via the digital yuan. This new approach is poised to bypass traditional payment methods known for their inefficiencies and high costs.

According to Di, this is more than a mere proposition; it’s a strategic shift towards bettering cross-border financial operations. Companies engaging in these transactions could expect to operate outside of the conventional single payment channel, thus streamlining processes and cutting operational expenses.

But the PBOC isn’t just stopping at commodities. Di mentioned the potential for broader applications, aiming to enhance the digital yuan’s usability for individuals and boost the overall user experience across the border.

October reports shed light on the digital yuan’s foray into the commodities market, detailing Petrochina’s settlement of a crude oil purchase using the Chinese CBDC. This transaction, amounting to one million barrels, was facilitated through the Shanghai Oil and Gas Trading Center, marking a milestone towards integrating digital currency in commodity trading.

The Shanghai Clearing House has also joined the trend, offering digital yuan settlement services for bulk commodity trades. Their zero-trading fee strategy stands as a clear incentive to promote the CBDC’s adoption.

However, the global implications of the digital yuan’s adoption in international trade are stirring debates. Concerns surfaced in August about the Mbridge project, a CBDC platform interlinking the economies of China, Hong Kong, Thailand, and the UAE. While still in experimental phases, the project represents a direct challenge to traditional financial systems and has the potential to shift over $500 billion in trade away from customary economic sanctions and settlement channels.

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