Digital Yuan symbol on blue technology background

China’s digital yuan used for crude oil deal: report

The Chinese digital yuan has shown promise in cross-border trade after its deployment in a massive crude oil deal involving a major state-backed entity.

As reported by China Daily, the state-owned PetroChina International Corp Ltd relied on the central bank digital currency (CBDC) to purchase 1 million barrels of crude oil. The first-of-its-kind deal was settled at the Shanghai Petroleum and Natural Gas Exchange (SHPGX), although the report did not disclose the vendor’s identity. The deal is part of the Shanghai municipal government’s efforts to expand the use cases of the digital yuan.

While Chinese authorities are making a case for local retail adoption of the digital yuan, the crude oil transaction has been construed as a statement of intent to explore the cross-border functionalities of the CBDC.

Previous forays for cross-border transactions with the digital yuan have been made through experiments with the Bank for International Settlements (BIS) and collaborations with other central banks in Southeast Asia and the Gulf.

An arrangement with Hong Kong will allow Chinese tourists to pay for goods and services in select regional stores with Mastercard (NASDAQ: MA) and Visa (NASDAQ: Vtop-up functionality available for international users. State-owned Bank of China and First Abu Dhabi Bank (FAB) have entered a cooperation agreement to explore the use of CBDCs in cross-border transactions, building on an earlier bilateral relationship between China and the United Arab Emirates (UAE).

Several reasons for China’s decision to pursue cross-border functionalities for its digital yuan have been proposed. The first is the need to reduce the cost and delays for international remittances, with the second being the need to reduce its reliance on the U.S. dollar for global trade.

Already, China has begun notching small victories in its ambition to reduce its dependency on the U.S. dollar. Days before the oil deal, China National Offshore Oil Corp completed a liquified natural gas trade with France’s Engie.

New data revealed by the People’s Bank of China (PBoC) shows a 35% growth in the use of the yuan in cross-border transactions over the last 12 months, with several BRICS and G20 nations warming up to Chinese legal tender for settling international trade.

Competing for the top spot in mainland China

Ahead of an official launch, PBoC officials are bracing themselves for a rough tumble with existing payment functionalities in China. The digital yuan is expected to face stiff competition from Alipay, WeChat Pay, and UnionPay, given their first-mover advantage and functionalities tailored to the average consumer.

Taking a cue from their model, the PBoC has been racing to roll out new digital yuan mobile app features, including offline payments, deployments in securities, and smart contracts. Adding a contactless payment feature and forays into cross-border payments is expected to give the digital yuan a fair shot at its competition.

To learn more about central bank digital currencies and some of the design decisions that need to be considered when creating and launching it, read nChain’s CBDC playbook.

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