China's Digital Yuan Strategy: Can the Yuan Really Replace the Dollar?

China has ambitions to put the yuan, rather than the US dollar, at the center of the global financial system. As a way to get there, it is considering introducing a digital yuan. Why does the Chinese government want to introduce a digital yuan? And could it replace the dollar?

The Digital Yuan Test Has Finally Begun

After years of preparation, China began experimenting with a digital version of the yuan earlier this year. The Chinese government recently completed a test of digital yuan transactions worth 2 billion yuan (300 million dollars) in four Chinese cities. If China expands this to every city, it looks set to overtake the European Central Bank's digital euro and gain the most powerful digital currency influence in the world.

Why Does China Want to Track Money?

So why does China want to track the paths these funds take? China is a system in which the Communist Party leads everything, and the government wants to hold firm control over the economy, finance, and social institutions. The purpose of tracking the digital yuan is precisely to gain even stronger control over these capital flows.

Like cryptocurrencies, the digital yuan borrows blockchain technology to record every transaction on a ledger. This means every transaction can be looked at any time, so the Chinese government will be able to use this feature of digital currency to track every flow of money.

Can the Digital Yuan Replace the Dollar?

It seems unlikely that the digital yuan will replace the dollar any time soon. According to CNN, the yuan currently accounts for only about 4% of international transactions. Considering that the US dollar accounts for 88%, that is a very low figure, and it is far lower than the euro, the yen, and other currencies as well.

Even if the Chinese government launches a digital yuan, distrust of the Chinese Communist Party, combined with the possibility that money movements could be controlled and censored, means it seems few countries will actively use it going forward. Within China, however, the existing yuan could be entirely replaced by its digital form, so the Chinese government looks set to gain even greater control over its domestic money flows and over the yuan itself.

Reference: China wants to weaponize its currency. A digital version could help