In October 2020 China has initiated one of the largest public tests of its digital currency. In the southern city of Shenzhen, the local government has handed out RMB 10 million to the general public in a lottery. The winners may download the digital currency app and spend their winnings in a pilot test area in Shenzhen at more than 3,000 merchants, but in fact, what is the digital yuan, and why is China pursuing the idea of the digitalization of its currency?

China’s digital yuan represents an encrypted digital form of the Chinese currency. The digital yuan is not a cryptocurrency like bitcoin, as it is issued and controlled by the People’s Bank of China (PBOC). Additionally, it is not going to replace e-wallets apps such as Alipay and WeChat Pay, and it is expected to be used together with digital wallets by both financial institutions and individuals.

The digital currency is aimed to replace cash in circulation, in particular coins and banknotes. Commercial banks will be responsible for distributing the new type of currency to users by making a deposit with the PBOC. In the recent trials in Shenzhen the digital yuan has successfully been implemented when paying in supermarkets and pharmacies. Moreover, two commonly used mobile apps, the taxi app Didi Chuxing and the food delivery app Meituan Dianping, have successfully participated in the testing.

In China, the digital currency will offer the following benefits:

- Improved data feedback and monetary policy transmission;

- Creation of a new payment network to further internationalize the yuan;

- Reduced cost of circulating paper money;

- Enhanced visibility over the cash flows to cut down on illicit transactions.

The research organized by the PBOC focusing on the development and launch of the country’s digital currency has been ongoing for six years. This demonstrates China’s determination to become the global leader and innovator in issuance and control of a digital currency. In addition to the lottery conducted in October in Shenzhen, some of the largest institutions, including state-owned commercial banks, have already implemented the internal testing of a digital wallet in preparation for the official launch of the digital currency.