Case Study 2 — China's Digital Yuan: The First Major CBDC
China launched pilot programs for the e-CNY (digital yuan) in 2020 and has gradually expanded them to cover hundreds of millions of users. It is the most advanced CBDC project by a major economy.
How it works
The e-CNY is issued by the People's Bank of China (PBOC). Users download a digital wallet app and can make payments using QR codes or NFC (similar to Apple Pay). The money is a direct liability of the central bank — not a bank deposit.
Why China is doing it
- Financial inclusion: reach people without bank accounts (though China already has high banking penetration)
- Reduce dependence on private payment systems: WeChat Pay and Alipay process the vast majority of Chinese digital payments; the CBDC gives the government an alternative
- Monetary policy transmission: the CBDC could enable "programmable money" (e.g., stimulus payments that expire if not spent, targeted subsidies)
- Surveillance: the CBDC gives the government visibility into every transaction — a feature the Chinese government values and that privacy advocates find alarming
- International competition: challenge the dollar's dominance in international payments (ambitious but uncertain)
The economics
The CBDC raises the same questions from §37.3: privacy (the PBOC can see every transaction), disintermediation (if people hold CBDC instead of bank deposits, banks lose funding), and the boundary between government and private finance.
Discussion questions
- Would you use a CBDC that your government could monitor? What privacy tradeoffs are acceptable?
- Could a Chinese CBDC challenge the dollar's reserve-currency status?
- Should the U.S. develop its own CBDC? What are the benefits and risks?