The Hong Kong Monetary Authority (HKMA), the primary regulator and supervisor of the financial system in the Hong Kong Special Administrative Region, and the People’s Bank of China (PBoC) have made further progress in the digital yuan, or e-CNY, pilot program for cross-boundary payments, to expand the scope of the e-CNY pilot program in Hong Kong to facilitate the setup and use of e-CNY wallets by Hong Kong residents, as well as the top-up of e-CNY wallets through the Faster Payment System (FPS).

As the HKMA noted in its press release, the interoperability between the FPS and the e-CNY system, operated by the Digital Currency Institute of the PBoC, also marks the world’s first linkage of a faster payment system with a central-bank digital currency system. It provides an innovative use case that underscores interoperability, a key area set out in the G20 road map for enhancing cross-border payments.

As Eddie Yue, chief executive of the HKMA, said, “Hong Kong has become the first place in conducting cross-boundary e-CNY pilot program, and has also become the first place outside the Chinese mainland that enables its residents to set up e-CNY wallets locally.”

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Starting from the beginning, though, we must remember that the digital yuan, or e-CNY, is a central bank digital currency (CBDC). A CBDC is indeed a new form of central bank money accessible to the public, accepted as a means of payment, as legal tender, and is a safe store of value for all citizens, businesses, and government agencies. While more than 80 percent of central banks in the world are currently working on CBDCs (with some just at the initial research stages), Asia is where CBDCs have generated the most interest — and the major economy leading the CBDC race in Asia (and globally) is China.

However, while the introduction of CBDCs promises a variety of efficiency savings and new functionalities, it is important to remember that it does not solve all the problems of payments — particularly cross-border payments — on its own.

That the HKMA and the PBoC are making further progress with the digital yuan in Hong Kong proves not only that the digital yuan is evolving well, but also that Hong Kong has been playing a very important role these last few years when it comes to the digital yuan tests and further deployment, and will continue to do so.

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Indeed, related to how well the digital yuan is progressing, transactions using the digital yuan, mostly for domestic retail payments in China, hit 1.8 trillion yuan ($230.2 billion) as of end of June 2023, with 120 million digital wallets opened, according to the latest disclosure from China’s central bank. Using the wallet, users can make payments at over 10 million merchants in 17 provincial-level areas and cities on the mainland.

Speaking at a high-level conference held by the HKMA and Bank for International Settlements in Hong Kong a few months ago, the former head of the PBoC, Zhou Xiaochuan, confirmed that 90 percent of payments in China are already digitized.

Also according to Zhou’s remarks at the conference, progress in CBDCs in China is “already on track” and the “final stage is not very far away”. Furthermore, he said, after China establishes a CBDC, there are other features the government can develop, such as cross-border payments and applications of tokenization like smart contracts.

This is indeed very relevant, since the scale and pace of CBDC deployment in China is so far unmatched anywhere else in the world. (Please note that when I say “anywhere else in the world”, I am referring to the world’s bigger economies, since there are smaller countries that have already deployed a CBDC, but China is ahead of the world’s other bigger economies.)

Moreover, I also think that what Zhou mentioned regarding cross-border payments is also relevant and goes in line with what I have been writing about the digital yuan for the past three years.

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China is certainly streets ahead in terms of digital payments, and the digital yuan doesn’t disrupt existing ways to pay (with QR codes and face payments already being widely used in China through Alipay and WeChat Pay). However, the biggest innovation is its ability to use smart contract technology. The Guangdong-Hong Kong-Macao Greater Bay Area, especially the Hong Kong SAR, boasts inherent advantages in the development of blockchain technology.

The e-CNY provides many other advantages: no interest, low cost, payment and settlement, controllable anonymity, security, and dual offline payment. Alipay, WeChat, and bank wallets remain the same, however; the e-CNY is simply the money in those wallets, as China’s legal tender issued by China’s central bank.

Also, focusing on Hong Kong: The special administrative region can play a key role in helping the yuan to internationalize, given its competitive advantages as the world’s largest offshore renminbi center and the “one country, two systems” principle, the cornerstone of the city’s system. According to the Society for Worldwide Interbank Financial Telecommunication, more than 70 percent of global offshore renminbi payments are processed in Hong Kong.

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As stated by the HKMA, the e-CNY will provide an additional safe, convenient and innovative means of cross-boundary retail payments to residents in Hong Kong and on the mainland. It will also enhance the efficiency and user experience of cross-boundary payments, and promote the interconnectivity of the GBA.

The digital yuan can indeed play a key role within the GBA, since Hong Kong is currently involved in many projects that will not only help it maintain its status as one of the world’s most important financial centers, but also enhance it, such as GBA development. In the country’s 14th Five-Year Plan (2021-25), the central government again recognized Hong Kong’s potential at the national level and has reaffirmed its commitment to support the HKSAR in strengthening its status as an international financial, trade and logistics hub.

Hong Kong’s new links with the mainland’s financial markets will definitely not only strengthen Hong Kong’s position within the GBA, but will also enhance its role as a world-leading financial center.

The author is a fintech adviser, a researcher, and a former business analyst for a Hong Kong publicly listed company.

The views do not necessarily reflect those of China Daily.