Marching forward with China’s state digital economy

State-led CBDC introduction will be a priority

China’s National Development and Reform Commission unveiled plans last month to expand the country’s digital economy. It added a target to China’s 14th Five Year Plan (2021-25), adopted last year, to increase the sector’s gross domestic product contribution to 10% by 2025, up from 7.8% in 2020.

This might be surprising in view of last year’s regulatory crackdown on private providers of digital finance, ride-hailing services, education, entertainment and gambling. This comes on top of cyber currencies being outlawed and peer-to-peer platforms regulated out of existence.

The regulatory tightening of the private sector sent a clear message that state-led digital development will be the priority. This follows the general trend that the state marches forward as the private sector retreats.

The digital economy is sometimes defined narrowly as online platforms and activities that owe their existence to such platforms. But all activities that use digitised data are part of the digital economy. The People’s Bank of China calls for fully activating the potential of data as a factor of production.

Big data are generated and transferred by three main actors: people, business and government. This can include people-to-business data, such as the information obtained by payment platforms and e-commerce, people-to-people through social networks and people-to-government through surveillance.

Measuring the contribution of the digital sector to GDP is a challenge which is yet to reach international agreement. It has been analysed in recent years, notably by the G20, the Organisation for Economic Co-operation and Development, the International Monetary Fund and the United Nations Conference on Trade and Development. In China, the Academy for Information Communication Technology is leading the analysis.

The G20 identifies two types of gaps in measurement approaches: methodological and availability. In a report published in 2018, methodological gaps are described as relating to ‘what existing indicators measure and how they capture the digital economy, or to what extent they do it.’ It includes the need to improve measures and identify where new indicators are needed. Availability gaps are linked to countries lacking the resources to effectively implement measurement approaches.

Measured by the combined value of technology production and integrated digital inputs to the rest of the economy, China’s digital sector amounted to 33% of GDP in 2017. This trailed Japan at 46% and the US at 60%, but China aims to raise this to 55% by 2025. However, when measured by the value added by industries in the technology sector, China’s digital sector made up just 7.8% of GDP in 2020, compared with 10.5% for the US.

Who or what will help China reach its digital economy targets, given that priorities are set for the state sector?

One candidate is the PBoC, with its central bank digital currency project at an advanced stage. It’s not clear when the digital renminbi will be rolled out, but certainly before the end of the FYP in 2025. If the PBoC succeeds in spreading the use of the digital renminbi, leading bank officials will earn major brownie points.

The application of the digital renminbi will go well beyond the current payments system. In addition to collecting big data, it will also enable the PBoC to provide quality input into a credit scoring system envisaged by the authorities. It will be a classic case of a digital intermediary input, a free service which yields a valuable data collection.

These plans for digital expansion may help us better understand China’s ambitious scope and speed for introducing its digital currency, quite different from the cautious approach by other central banks.

Herbert Poenisch is Senior Fellow, Academy for Internet Finance, Hangzhou, former senior economist, BIS.

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