”Currently, less than 2% of world trade is determined in Chinese Renminbi… China is among the top two world powers today in many ways ahead of the US, which at the moment seems to be a bumbling power at best”.

Whatever China does – tends to generate a host of conspiracy theories. However much we may disagree with the numbers, the fact remains that today it is already world’s second largest economy. ‘In many ways ahead of the US, which at the moment seems to be a bumbling power at best’, says Dr. V. Raghunathan (www.vraghunathan.com).  A renowned author, thinker, distinguished academic, ex banker – his list of accomplishments is truly phenomenal and interests eclectic.

While Dr. Raghunathan reminds us that despite its rise to the top league, only less than 2% of world trade is determined in Chinese RMB. It’s desire, therefore, to correct this imbalance is quite natural. Needless to mention that what China is proposing today will go way beyond what others have tried or are trying. ‘Usually, what China strategizes, China delivers’, he says. However, in his belief ‘even if the e-RMB is rolled out, it could be a long way to go in winning the trust of the world as much as the US did in the Post World War 2 era’.

Praveen Gupta: Do you believe that national digital currencies could mean greater financial inclusion, less financial crime, and more efficient cross-border transmissions?

V. Raghunathan: At the outset, I must confess that I do not regard myself an expert in International Finance, beyond teaching the subject at the IIMA in the past. But let me answer your questions the best I can…

I am assuming of course that your question is in relation to China’s digital currency experiment, with their stated position:

“A sovereign digital currency provides a functional alternative to the dollar settlement system and blunts the impact of any sanctions or threats of exclusion both at a country and company level”.

We understand financial inclusion to mean availability and equality of opportunities to access financial services. Currently, less than 2% of world trade is determined in Chinese Renminbi, which is disproportionately small as compared to China’s share of international trade. So, if China wishes to correct this imbalance, that’s certainly financial inclusion.

PG: Digital payment platforms are already widespread in China, namely Alipay, owned by Alibaba’s Ant Financial, and WeChat Pay, owned by Tencent, but they do not replace existing currency. Facebook’s Libra has reportedly triggered the fast tracking by the Chinese?

VR: The difference lies in what is State sponsored and what is privately floated. Consider this: In its experiment on digital currency, limited to Shenzhen, Suzhou, Chengdu and Xiong’an, China plans to transfer salaries in to government workers in the form of the new Digital Currency (internally referred to as DC/EP) and tying up with a set of designated merchants to facilitate transactions using the currency. Their end goal is to have full-fledged functionality by 2022. So, you can see where the private players fit in. I guess that is the difference between their planned e-RMB and the private players.

In its experiment on digital currency, limited to Shenzhen, Suzhou, Chengdu and Xiong’an, China plans to transfer salaries in to government workers in the form of the new Digital Currency.

 PG: In 2015 Ecuador launched an electronic money system followed by Uruguay piloting its e-peso in 2017. The Dutch are experimenting with a bitcoin based “DNBcoin”. And Canada, Australia, Sweden, Israel are actively exploring a national digital currency. Could China be the biggest mover and shaker in this space?

VR: Well, yes. China is among the top two world powers today. The manufacturers of the world. The exporters to the world. Financiers of the world. And with muscle to match gun-for-gun, in many ways ahead of the US, which at the moment seems to be a bumbling power at best. China’s foresight and world leadership is evident in their projects like the OBOR, China-Russia-Canada-America rail project, or the Russia China Gas project et al, which are just a few examples of China’s scale and grandiosity of their ambitions and plans. Their clout in the UN, the spread of their tentacles in Asia, South Asia and Africa, and even South-America (Nicaragua, Colombia and Brazil), and even their muscle in high-end technology and R&D are all evidence that they have arrived. And arrived in a fashion that rivals the USA true and proper.

China’s foresight and world leadership is evident in their projects like the OBOR, China-Russia-Canada-America rail project, or the Russia China Gas project et al, which are just a few examples of China’s scale and grandiosity of their ambitions and plans.

So yes, what China is proposing today will go way beyond what others have tried or trying. Usually, what China strategizes, China delivers.

PG: A decline in cash usage is expected to continue amid the growing popularity of digital payment platforms and as people avoid physical contact during the coronavirus pandemic?

VR: Yes. That is bound to happen worldwide. As a matter of fact, Europe and UK have had little use of cash currency for a long time.

But a more rural and a poorer nation like ours may have a little longer wait. That said, the fact is that various payments involving both smart and non-smart phones have gained significant currency in India in recent years. But India also suffers from connectivity issues which will be crucial if we are to move in the direction of digital currency all the way.

That is bound to happen worldwide. As a matter of fact, Europe and UK have had little use of cash currency for a long time... But India also suffers from connectivity issues which will be crucial if we are to move in the direction of digital currency all the way.

That said, I do not think China’s ambition with e-RMB has much to do with Covid-19. I think China wishes to rival the USD. Others have tried. The sterling, the Deutsche Mark, and the Swiss Franc.

PG: While Mesopotamia may have been the birthplace of the currency system, the Chinese civilisation is also one of the oldest known users of physical money. As a behaviour finance expert what implications would you anticipate? Would there be a generational bias for and against?

VR: Ha ha ha! Well, I do not really know if behaviour of 2000 years ago gets embedded into the DNA of the subsequent generations or whether there is a gene for singling out the propensity to hold on to physical money as opposed to digital money. But on the generational point, I am all the way with you. When the very mention of sending out a Zoom invite or live streaming something on the Facebook can get any senior citizen to break into cold sweat, carrying absolutely no cash on one’s person can certainly be mildly traumatising. True, many of them do on-line banking or on-line payment of bills aplenty. But to think of money digitally without a back-up currency to hold in one’s hand perhaps comes more naturally to a youngster than the older generation like ours!

But to think of money digitally without a back-up currency to hold in one’s hand perhaps comes more naturally to a youngster than the older generation like ours!

Besides, the behavioural attitude towards money is also about the level of education. A less educated person is more bound to see a transaction as an exchange of something for something else, with money usually being on one of the things in non-barter economies. So, when you get your salary online and spend online, it takes some getting used to.

PG: Do you foresee any privacy issues?

VR: Of course. Actually, both privacy and security issues. The two are linked.

KYC (Know your customer) norms of a bank alone, if shared widely, can seriously compromise the clients’ privacy. Often, digital applications go with significant amount of personal information, especially financial applications. Unscrupulous governments, corporates, politicians, and others are known to have misused such data in large scale for profit, for targeted selling, targeted vote-spiels, or for perpetuating frauds.  Individuals can be monitored for their lifestyles, leaving nothing private or confidential. And what is available to some can easily become available to anybody, for a price. So yes, privacy issues could be dire.

Often, digital applications go with significant amount of personal information, especially financial applications... Individuals can be monitored for their lifestyles, leaving nothing private or confidential.

There is no on-line transaction or content which is not open to hacking and therefore misuse. More often than not illicit hackers operate as much at the cutting edge of technology as the ordinary coders or may be more so. You will be surprised at the quality of talent and the level of cutting-edge technology that goes into hacking, at minimal costs! If a legit corporate could do at a time frame, cost, and talent what a hacker does, they would be proud of themselves.

PG: As one of the largest economies, in what way/s could China’s full-fledged migration disrupt the global financial order?

VR: In the foreseeable future the disruption may not be significant. When the Euro was spawned, one imagined it would become a rival to the USD, as nations started replacing some of their USD reserves with Euros. That did not happen in any significant manner. Nor did the Pound Sterling, Swiss Franc or the Deutsche Mark ever become a serious threat to the USD even in the pre-Euro days.

In the foreseeable future the disruption may not be significant. When the Euro was spawned, one imagined it would become a rival to the USD, as nations started replacing some of their USD reserves with Euros.

Besides, I do not see a lot of countries in the world, barring a few African or South American countries and a Pakistan here or a Nepal or Sri Lanka there denominating their trades in e-RMB. I think even if the e-RMB is rolled out, it could be a long haul for China.

Notwithstanding their world-vision, China is still viewed a bully of sorts and its political leadership in the world is yet not at par with what the US had post-World War II. True, Trump may have taken the sheen off the US somewhat for now, and US too may be a bully of sorts especially if you ask some countries in the Near East and Middle-east Asia, China has a long way to go in winning the trust of the world as much as the US did in the Post World War II era. Yes, World War II was a good 75 years ago, but the benchmark remains firmly entrenched in the world psyche.

PG: Many thanks for these valuable insights!