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CBDCs Are Weapons in the China vs US Trade War

CBDCs Are Weapons in the China vs US Trade War

To avoid obstacles in its trade relations with China, the government of Rwanda decides to launch its CBDC.

CBDCs Are Weapons in the China vs US Trade War. The trade conflict that since 2018 has generated a battle between China and the United States. The two largest economies in the world are creating sequels that affect the dynamics of the other countries. China and the US even influence decisions countries make in their trade relations. The weapons they use in the battle have even touched the payment systems used for trade. This dangerous trend leads us to think that even central bank digital currencies (CBDC) would be part of the artillery used in this trade war. Proof of this is what is happening in Rwanda, a small country located in East Africa.

Rwanda signed up in the race for central bank digital currencies (CBDC.) They announced the development of tests for launching a digital version of the Rwandan franc. The tests will begin at the end of this month, following a period of public consultations on the development of the digital currency.  Several companies will participate in the process. They’ll try to test the effectiveness of the CBDC in cross-border payments and give continuity to the research that began in 2021.

Rwanda and CBDCs

According to Soraya Hakuziyaremye, deputy governor of the Central Bank of Rwanda, the CBDC will be ready in 2026. They stimulate the in the medium term as part of their efforts to “rationalize the financial system and position itself as a major player in the future of the global economy.” What is most striking about the announcement is the motivation behind the project. As the official explains, one of the objectives is to boost international trade. The idea is to align with the payment mechanisms used by their trade partners.

“The Central Bank must make sure that we are ready for innovations that are also being experimented with in other countries with strong trade links with us,” said the Deputy Governor. A statement with which she refers to China. It so happens that the Asian giant has become the African country’s leading trading partner in recent years, followed by the United Arab Emirates.

Soraya Hakuziyaremye, deputy governor of the Central Bank of Rwanda, advocates the development of a CBDC.

Rwanda’s plans highlight the CBDC role in future international trade dynamics in the context of the trade war. Relations between China and Rwanda started to strengthen in 2018, reaching such a level that China displaced the United States. As a consequence, there are strong ties that Chinese officials replicate with other countries on the African continent. To the point that central banks in the region have even expressed plans to add the Chinese yuan to their reserves. Many attribute the situation to the struggle to dominate international trade waged by the two world powers in a geopolitical game, now moving to cross-border payments and where CBDCs are getting involved.  

China seeks to integrate the digital yuan and CBDCs into international trade

In this context of confrontation, China seems to aim that -in the medium or long term- the commercial exchange with its partners will end up being executed with digital currencies, leaving aside the dollar. These reasons drive Rwanda to overcome any obstacle that may arise in trade exchanges with China, the leaders, and promoters of the process of global de-dollarization. They have the most advanced CBDC project worldwide.  

China’s national currency virtually dominates its international trade. The goal is for the digital yuan to be part of that cross-border exchange. They already used CBDC last year as a means of payment in an international transaction. A test that the authorities of the United Arab Emirates also did with the digital dirham. Rwanda’s motivation for launching its CBDC to facilitate transactions with China, currently settled in yuan, is thus understandable.

The situation repeats with payments between China and countries such as Russia, the United Arab Emirates, Brazil, and many others. Other African nations like Nigeria and South Africa are on the waiting list. All stand out as having moved forward with their central bank digital currencies. Most of these countries, most notably China and the United Arab Emirates, are part of the BRICS bloc, a group of 10 nations that already transact using their local currencies to pave the way for the de-dollarization of their economies.

The role of BRIC countries

The BRICS plan is to develop its cross-border payment system based on its CBDCs. Therefore, its members are striving to keep their CBDC projects on track. In addition to China, Brazil and the United Arab Emirates have the most advanced projects. Rwanda is not in this bloc, but having China and UAE as leading trading partners increases the pressure to join the CBDC race. The deputy governor of the Rwandan Central Bank fears that the country will be left behind. The situation could mean a disadvantage if it does not pair its cross-border payments system with partners who plan to trade with its digital currencies. Hakuziyaremye fears are possibly present among other partners of the Asian country.

“One example is China, whose CBDC is now in the pilot phase. Imagine cases where trading partners adopt a national digital currency while Rwanda cannot trade because we do not have the technology. This situation would negatively affect the private sector in both countries.”

Soraya Hakuziyaremye, deputy governor of the Central Bank of Rwanda.

The Rwandan official puts forward more reasons to substantiate the benefits of the CBDC project, even though she acknowledges some concerns about low adoption, lack of privacy, and threat to financial stability. However, its arguments demonstrate that the priority for the country is to maintain the trade partnership with China.

Many also expect that, in a scenario where the BRICS trade cryptocurrencies among themselves and other countries launch their digital currencies for trade (as Rwanda plans to do), the United States will lose the battle against China.

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