Hong Kong makes apt testbed for e-CNY cross-border use

Hong Kong serves as a fitting testbed for international payments using the e-CNY, China’s central bank digital currency (CBDC), given its political and economic nuances, industry experts say.

“What Hong Kong provides to China is a perfect experimental halfway house between making the e-CNY global and yet internationalizing it while keeping political control of it,” David Roche, a strategist at Independent Strategy, told BitcoinLinux.

The pilot in Hong Kong goes in line with China’s overall strategy to have the former British colony serve as its bridge to the world. For example, Hong Kong has been a primary offshore yuan trading center, with over 70% of offshore yuan settlements being made through Hong Kong, according to a February briefing

of the Hong Kong Monetary Authority (HKMA), the city’s de facto central bank.

Now the city is expected to become a laboratory for Chinese authorities to pilot cross-border payments with the digital yuan, which the HKMA said will roll out soon after the Spring Festival.

Roche said Hong Kong is an obvious choice “because for a start, it’s a part of China but has a separate currency,” making it a good test site for the authorities to learn how to make e-CNY international payments.

The upcoming pilot program is just the beginning of a wider implementation for e-CNY’s cross-border use, experts said.

“After an initial focus on retail payments, [the pilot] will later be extended to wholesale transactions,” said Matteo Giovannini, a senior finance manager at Industrial and Commercial Bank of China, the world’s largest bank by assets.

The small scale of this specific pilot initially limited to the Greater Bay Area (GBA) — which connects Hong Kong, Macau and Guangdong province — shouldn’t worry observers that much “since China has always followed a very prudent approach in pilot testing,” Giovannini told BitcoinLinux.

Stanley Chao, managing director of Asian business strategy firm All In Consulting, shares a similar view. “It will expand to wholesale transactions and later to international trade and banking transactions which could amount to billions of U.S. dollars’ worth of transactions annually if not monthly.”

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Chao added that the pilot run has significant cross-border implications. Countries such as Singapore, Malaysia and those in the Middle East that have significant trade with China would be interested in the pilot results as they seek to develop their own digital currencies and “eventually tie up with China’s e-CNY,” he said.

Post-pandemic recovery

The HKMA said in its September financial stability report that the pace and strength of economic recovery remain uncertain, hinging on the ongoing pandemic and uncertainties over China-U.S. geopolitical tensions.

That, coupled with the immigration of skilled manpower out of Hong Kong, have made the city less attractive as a financial hub, and “extreme measures should be taken to change the course and bring Hong Kong back again to its financial primary status,” Amnon Samid, CEO of Israel-based cybersecurity company BitMint, who participated in developing retail CBDC trials for China, told BitcoinLinux.

Deploying the e-CNY will enable Beijing to manage and control money flows between GBA and Hong Kong, while also improving cross-border payment efficiency, reducing payment costs and offering better transaction transparency, Samid said.

Capital control

For years, China has implemented tight control over capital outflows. “They don’t want the current capital within China to be able to leave whenever people want to move it because that would destroy the domestic economy as they wouldn’t be able to control their monetary policy,” Andrew Collier, managing director of Orient Capital Research, told BitcoinLinux.

Roche of Independent Strategy also said that for China, “it doesn’t want to see large capital outflows destabilizing the RMB — whether it’s the e-CNY or the CNY — and they don’t want currency volatility.”

Now with the introduction of the e-CNY, such tight control could be slowly loosened up, according to Chao from All In Consulting. “Previously, cash or paper money posed a money-laundering issue, thus prompting China to impose severe cross-border controls,” Chao said.

“But with the e-CNY and less cash transactions, China can easily monitor cross-border transactions and thus allow more funds to flow without having to worry about money-laundering,” Chao added. With e-CNY’s programmable nature, “we can look toward an end to capital control because the currency itself will be controllable,” said Richard Turrin, a Shanghai-based fintech consultant.