What investors need to know about DCEP and China's digital currency

Major innovations are currently underway in China and we are at the cusp of another major digital revolution. The country is set to launch a national digital currency (DCEP) and blockchain-related initiatives. Along with other emerging technologies like artificial intelligence, the Chinese government has identified blockchain technology development as an issue of national importance. We believe the imminent launch of DCEP and the ongoing rollout of a blockchain network should further support China's global technology ascent.

In our "Information technology" report, we discuss the rising tide of accelerating fintech industry innovation and how this should benefit key stakeholders in the near term. We also share our view on how these initiatives should further support China's ongoing digital ascent and its strong fintech ambitions. We see many implications that are largely positive across macro and leading sectors in China, continue reading to find out more.

DCEP is a by-product of years of research and innovation by China on digital currencies, which are a digital form of fiat money. The blockchain networks are a result of prioritizing investments to build a strong domestic distributed ledger ecosystem. We are positive on the long-term growth prospects of both initiatives, as we expect them to generate significant economic value over a period of time across industries like financials, healthcare, manufacturing, etc., and stimulate further innovation in the country. The question is how should investors position to benefit from these trends.

While we believe the ongoing digital currency and blockchain initiatives would affect many industries in China, there is a disproportionate impact on internet firms and banks, which we address in the full version of the report. During the past few years, China has been steadily marching toward a cashless society. Mobile payments are now ubiquitous in China. More than 80% of smartphone users use their mobile devices to pay for point-of-sales transactions on a regular basis, the highest mobile payment adoption rate in the world.

High-profile Chinese internet giants are reported to be among the organizations working with the PBoC to develop China's DCEP, as their deep know-how in back-end infrastructure, superior user interface and consumer application scenarios are invaluable for the PBoC to move toward DCEP adoption. With its advantages clearly highlighted, we believe such cooperation should broaden DCEP's application to many areas.

While bears may argue that DCEP's rise will weigh on the fintech ambitions of Chinese internet majors, in the near term, we do not see a significant impact. Mobile payment services generate an insignificant contribution to bottom lines, and the pilot is only going to start in select cities from May before gradually rolling out in the coming quarters or even years.

However, in the long term, we foresee DCEP to challenge the electronic payment status quo, as its arrival removes intermediaries and introduces digital wallets as a means of payment instead.

Mobile payment user penetration in China, 2019–2023E