“Investing” in Digital Yuan: Myths & Facts

Investing in Digital Yuan

The search term “Investing in Digital Yuan” is encouraging to see, because it demonstrates the growing interest in the currency. However, it seems that this particular search is actually often made from a place of grave misinformation. 

Today we will focus on reiterating the facts about China’s new digital currency. 

What is the E-CNY? And can you “buy” it? 

The Digital Renminbi is not a Cryptocurrency

The myth around “buying” Digital Yuan as an investment principally comes from the misunderstanding that it is a cryptocurrency. The Digital Yuan is NOT a cryptocurrency. 

In 2021, the Chinese government outlawed all cryptocurrency trading and mining for a number of reasons. 

Criminal activity such as money laundering were one of the primary causes for the crackdown on crypto. It was revealed that 40% of Bitcoin transactions were illegal dealings. 

Another glaring reason for the cryptocurrency ban in China is the lack of regulation that it comes with. For any economy, regulating the amount of credit circulating in it, is crucial. Unregulated credit can result in detrimental levels of inflation or deflation, collapsing an economy. A central regulatory body is essential for carrying out this task; Namely, the Federal Reserve in the United States, the People’s Bank of China (PBOC) in the PRC, the Bank of England (BoE) of the UK, etc. The main “selling point” of cryptocurrency is its lack of a central regulatory system. While this feature may be an attractive prospect for those who are disillusioned and disappointed by our current financial structures, cryptocurrency is, in reality, more detrimental to global financial stability than helpful. 

The third reason, although ignored by many Bitcoin fanatics, is the energy-intensive cryptomining process. 

The Chinese government has been taking strict measures to cut down as much greenhouse emissions in the already highly industrialized nation. Eliminating an activity that is both detrimental to nature and the economy was a most rational choice. 

China’s crackdown on cryptocurrencies has been one of the strictest moves taken by a state in putting a cap on “cryptomania”. 

Before the ban, China was the largest crytomining hub in the world. 

The United States has since claimed the spot. 

The Digital Yuan is a CBDC

The Digital Yuan is a Central Bank Digital Currency (CBDC). This means that it is simply a digitized version of the country’s fiat currency, and the sole authority of issuing it lies with the PBOC. 

Until the E-CNY becomes the primary medium for local transactions across China, it will be used side-by-side with physical Yuan. 

In addition to this, the Digital Renminbi is projected to provide low-cost, efficient, and intermediary-free cross-border payments in the foreseeable future. 

This move may streamline global trade to a significant degree. As of 2022, China is the world’s largest trading partner. 

For this reason, the E-CNY will be a welcome addition to international payment mechanisms. 

How to Actually Invest in the Digital Yuan

The first image that may come to most people’s minds at the mention of investing in currency is probably forex trading. However, there are more solid and legitimate ways to invest in the Yuan- and in the future, the Digital Yuan. 

In 2017, Chinese authorities uncovered an underground bank that had been conducting illegal forex transfers. They were found foregoing forex controls by using fabricated trade deals and fake receipts. Forex transfers worth nearly 50 Billion Yuan or 7.3 Billion USD had been made at the time, according to the State Administration of Foreign Exchange (SAFE). 

In 2021, China further tightened its forex regulations. Market participants were barred from manipulating closing currency prices and other benchmark prices, according to the guidelines. 

Participants were also prohibited to use their dominant market positions to influence prices. 

The lack of general regulation in the worldwide forex trading sphere calls for any cautious government to take firm steps regarding it. 

What are Some Legitimate Ways to Invest in the Yuan?

Certificates of Deposit (CDs) and Negotiable Certificates of Deposit (NCDs)

CDs are offered by banks and credit unions. This product provides an interest rate premium to customers who agree to leave a lump-sum deposit for an agreed-upon period of time, without making withdrawals or extra deposits prematurely. 

NCDs are an interbank debt instrument with short-term tenors upto one year. 

Foreign Bond Funds

Foreign Bond Funds are mutual funds that invest in foreign government bonds. They earn interest in the denominated foreign currency. Those investing in bonds denominated in Yuan will receive interest in Yuan. If the Yuan rises in value relative to your local currency, the interest earned would increase once converted back to your currency. In 2014, the UK government issued Yuan denominated sovereign bonds worth 3 Billion Yuan. 

Chinese Government Bonds (CGBs) 

An investor may also look to Chinese Government Bonds issued by China’s Finance Ministry to invest in the Yuan. 

Policy Financial Bonds (PFBs)

Policy Bank Bonds are quasi-sovereign instruments issued by the China Development Bank, the Export-Import Bank of China, and Agricultural Development Bank of China. 

The Chinese Bond Market is closely regulated by several government bodies. The National Association of Financial Market Institutional Investors (NAFMII) looks over the interbank market, with close guidance from the People’s Bank of China.

Trading is finally conducted through the China Foreign Exchange Trade System (CFETS). 

For these reasons, the above mentioned bonds are a relatively safe and highly reliable investment option for those looking to invest in the Yuan – and eventually the Digital Yuan.