Wider adoption of e-CNY poses risks to China’s banking system: Moody’s

Digital renminbi will test banks’ ability to address risks.

Wider adoption of China’s digital renminbi (e-CNY) poses adjustment risks to the banking system, says Moody’s Investors Service.

Digital renminbi is expected to gain broad public acceptance as a digitalised form of legal tender, supported by China's well-established network infrastructure and wide broadband mobile penetration, according to Yan Li, a Moody’s assistant vice president and analyst.

“Moreover, e-CNY's offline feature will allow transactions where network coverage and connections are lacking, adding to its robust nature as a transaction medium,” he added.

The adoption of e-CNY will improve operator banks' competitiveness in the online payment market. The close integration of banks in the e-CNY regime will also encourage its users to stay within banks’ retail payment services, minimising the risk of disintermediation.

However, banks still face adjustment risks when e-CNY debuts as a more efficient and inclusive form of the monetary base.

“They will have reduced ability to earn interest on cash in transit whilst facing potentially increased volatility in the composition of money supply,” Moody’s said in a report.

The higher technology spending amidst limited fee opportunities will also pressure banks’ profits should e-CNY usage spread to the wider banking system.

“More institutions would then have to make a significant and steady investment to integrate e-CNY functions into their applications. And integrating e-CNY functionalities will test banks' ability to address related social and governance concerns, such as privacy and cyber risks,” Moody’s warned.