China to begin paying interest on its official digital currency: Report

China will reportedly begin paying interest on its official digital currency, the E-CNY, from January 1, in a move intended to encourage wider use, after nearly a decade of pilot programmes and development. According to an article by Lu Lei, deputy governor at the People’s Bank of China (PBOC), published on Financial News, commercial banks that operate digital yuan wallets will now pay interest to clients based on the amount of virtual currency they hold.

The initiative formally aligns the digital yuan with traditional bank deposits, granting it the same legal status as deposits held at commercial banks, as mentioned in a report in Singaporean financial newspaper, The Business Times. This regulatory change builds upon China’s position as a global leader in the development of official digital currencies since the launch of the digital yuan project in 2014.

China’s push comes as households have increased their savings and loan growth has weakened to record-low levels at commercial banks, creating a backdrop of large deposit volumes and diminished lending activity.

Despite being piloted in more than half of mainland provinces, the E-CNY has struggled to achieve widespread adoption, the report added. The currency faces strong competition from established digital payment platforms such as WeChat Pay and Alipay, which dominate China’s payments landscape.

Internationally, China’s ambitions for cross-border digital payments have encountered obstacles. The multilateral mBridge project, intended to facilitate cross-border transactions, suffered a setback when the Bank for International Settlements withdrew last year over concerns regarding potential misuse and the risk of undermining the US dollar.

Interest rates on demand deposits at China’s largest banks have dropped to 0.05 per cent after years of rate cuts, posing challenges for banks managing high deposit volumes.

The PBOC has increased efforts to advance the digital yuan, with recent steps including the establishment of a digital yuan operations centre in Shanghai. This centre supports platforms for cross-border payments, blockchain technology, and digital asset development. In October, the Communist Party called for “steady development” of the E-CNY in the next five-year plan.

Unlike the United States and other countries embracing privately issued stablecoins backed by cash-like assets, Chinese authorities are focusing on the official E-CNY. Despite signs of interest in stablecoins over the summer, officials remain concerned about risks such as speculation, fraud, and financial instability.