A central bank-backed digital yuan pilot project concluded on Sunday in China, with analysts saying it extended the country’s lead in the global race for central bank digital currency (CBDC) development.

Fifty thousand randomly chosen consumers received online wallets that contained 200 digital yuan ($29.75) each as part of the trial program. The “red envelopes” refer to China’s traditional method of gifting cash.

Here are some details about China’s digital currency development.

Digital yuan – What Is It?

In a government-led trial last year, the digital yuan finally arrived in ordinary users’ wallets after almost eight years of development. Six commercial banks distribute the digital currency via wallet apps, typically through the central bank. One of the six banks, Postal Savings Bank of China, has developed digital yuan chips embedded in physical wallets. Users can scan with QR codes or use wearable devices. Government data show that 34.5 billion yuan ($5.3 billion) in transaction volume had been transacted by June, with around 20 million digital yuan wallets in existence.

China’s digital currency rollout: how’s it going?

In my opinion, China’s digital yuan is the most advanced CBDC initiative being developed around the globe.

With Bitcoin and other cryptocurrencies gaining traction, central banks, including PBOC, cannot control them.

A digital yuan program has been in development since 2014, although only limited details have been disclosed so far. It remains unclear when it will launch, for example.

The digital YuanPay Group, which came into use in Shenzhen in October 2020, has proven to be a valuable method for paying for goods on the ground with a series of pilot programs.

Several lifestyle apps are involving in the trial, including Didi Chuxing and Meituan Dianping.

What is the process?

From the user’s point of view, this is somewhat similar to existing commercial Chinese digital payment services like Alipay and WeChat Pay: users download digital wallets into which funds store, generating QR codes that shops can scan.

There are more complexities to the system, however. It is not design to replace money, such as coins or banknotes deposited in long-term bank accounts, but to replace cash in circulation.

Ultimately, commercial banks will be responsible for distributing digital currency. They will need to deposit the same reserves with the PBOC as the digital currency they distribute.

Keeping a database of digital yuan flow between the central bank and commercial banks will enable them to monitor the relationship between users, something that isn’t possible with coins or banknotes.

Blockchain technology, which means transactions can be verified without banks, is not used by the digital yuan pay group, unlike Bitcoin.

Then what will be the effect?

Chinese policymakers would have more visibility into will China’s economic functions if the digital yuan becomes more widespread.

By tracking any illicit flows of funds such as terrorism financing or money laundering, they would also target monetary policy interventions at specific populations, regions, or economic groups.

They could also have negative cash interest rates in extreme economic circumstances.

In time, using the Digital Yuan could benefit the Chinese goal of internationalizing its currency, which could encourage users in other countries to use it.

Consumption of luxury goods

Stronger national currencies mean consumers have greater purchasing power. So traditional shopping habits need modification and consumers to spend more.

When individuals have a higher disposable income or a higher portfolio value, they are more likely to spend. Consumers will buy more if they can purchase Western goods more cheaply than before with their currency. Therefore, Western brands are left with two options: either maintain current prices and sell more products or raise prices to regain their exclusivity.

Luxurious brands continue to be exclusive through the suitable encouraging pricing model, so let’s not forget that. Therefore, these brands should remain out of reach for most people. In this confusing age in which luxury is losing its heritage and the essence of its tradition, the affluent class will stay away from Louis Vuitton bags as long as everyone can afford them. Therefore, luxury brands are increasing their prices to regain exclusivity.

Also..

The luxury industry raised prices in summer 2014 when the pound reached five-year highs against the euro. The dollar to protect their margins and brand image.

During China’s currency volatility, luxury brands can justifiably raise prices. It is possible to point to various instances when Beijing devalued its currency. It helps to make China’s exports more competitive and gain a competitive advantage in global trade.

Luxury labels in China: the impact

We can look at successful Chinese entrepreneurs such as How Tai Fook, Shang Xia, Shanghai Tang, Moutai, and Kweichow. Chinese luxury labels are relatively unknown to the majority of Western consumers.

Chinese luxury labels struggle in the West because of weak brand names. However, a rising yuan can further hurt these labels by raising export costs and making them less competitive. The number of exports will decrease, and the business cycle will weaken.

A loss of manufacturing jobs will lead to the government subsidizing the domestic luxury sector. Also, it is encouraging domestic demand by new tax and tariff policies penalizing Western luxury brands.

Western fashion capitals are becoming increasingly popular for shopping

Due to the RMB’s increased value, Chinese travelers will spend more during their vacations since they can go shopping overseas.

In addition to room upgrades and benefits from flying business class, your experience will be elevated with extra shopping sprees in designer boutiques in Europe or America. It means a surge in Chinese consumers in luxury stores.

Chinese tourists will likely shop in traditional luxury markets more frequently because they’ll benefit from favorable conversion rates. To meet the growing demand, top luxury labels will increase their prices for accessories and entry-level items.

Western consumers are suffering under the current economic situation, so implementing this pricing strategy will penalize them even more. Western consumers will experience a downgrade in consumption, moving from luxury to premium brands or even lower, more affordable options, as luxury labels become even more expensive.