Zhou Xiaochuan: The Father of the Digital Yuan

The former governor of China’s central bank, Zhou Xiaochuan, helped pave the way for China’s national digital currency (DC/EP), which is poised to have a major impact on both China and the global economy. 

A number of experts believe the digital yuan could challenge the supremacy of the U.S. dollar, disrupt China's well-developed mobile payment industry and create new efficiencies in the Chinese economy. Thanks in part to Zhou’s efforts, while other nations’ digital currencies are still in initial planning stages, China is at the forefront of monetary innovation. 

Zhou, 72, was the longest-serving governor of the People’s Bank of China (PBOC). He headed the bank for 15 years starting from 2002, at a critical period for the DC/EP’s development. 

“The central bank thinks financial technology can drastically change the future of digital payment and we highly encourage fintech innovations, but digital currency and blockchain would elicit [an] unexpected impact and we need to help develop them while hedging any potential risks ahead,” Zhou said during a press conference in March 2017. 

As is often the case with powerful Chinese officials, relatively little is known about Zhou personally, and we weren’t able to reach him for this article. But a close study of his writings and observations about him from experts paint the picture of a man with international tastes: He is fluent in English and likes to drink French wine, play tennis with foreign leaders and listen to English language radio shows such as Voice of America (VOA) in his office. 

Since his retirement in 2018, Zhou has been working as the vice chairman of Boao Forum for Asia, a non-profit organization hosting conferences for world leaders.   

The central banker spearheaded the DC/CP project at a time when other central bankers were highly skeptical of the notion of a central bank digital currency, said James Cooper, an associate dean at California Western School of Law, who served as a member of the U.S. government's delegation to the World Intellectual Property Organization and consultant to the U.S. Department of State advising on emerging technologies. 

“Zhou understands greatly the increasing role the Chinese yuan can play internationally to take on the U.S. dollar being the sole global reserve currency,” Cooper said, “While the West is busy telling you why it won’t work and its challenges, China just put its nose to the grindstone and quietly developed its central bank digital currency over the last five years.” 

His wide-ranging experiences and technocratic background, unlike most of the other central bankers in the world, have paved the way for Zhou to be a pioneer of the DC/EP, Cooper said. 

After receiving his PhD degree in Automation and System Engineering from Tsinghua University, Zhou helped reform economic policies ranging from foreign exchange, international trade to regulations on the Chinese stock market throughout the 1990s and the early 2000s,  according to his bio on the Group of Thirty (G30), which is a consultative group of the world’s leading financiers and academics based in Washington, D.C.

Overseen by the PBOC, China’s digital currency project is closely watched around the world. Many central banks are considering digital currencies (CBDCs) but China’s project is years ahead. Under Zhou, the PBOC was already doing the detailed engineering, design and policy work required to digitize a currency back in 2014. By contrast, U.S. Federal Reserve Chair Jerome Powell has emphasized caution in developing a digital dollar, signaling it’s unlikely to appear soon. 

See also: Patrick Murck & Linda Jeng – How a Digital Dollar Can Make the Financial System More Equitable

China started trialing the DC/EP this year in Shenzhen with $1.5 million giveaways, encouraging citizens to use the digital currency. The PBOC aims to launch another trial for international users during the 2022 Beijing Winter Olympic Games. It hopes the digital yuan will make renminbi (yuan) widely used in the global banking system to counter the U.S. dollar’s dominance as well as rein in Chinese digital payment giants. 

Facebook’s top executive on the Libra (now Diem) Project David Marcus said China would create a digital currency system that can be entirely out of reach for U.S. authorities, where the U.S.’s financial sanctions would have little effects. If DC/EP gets widely adopted across the world, many countries could opt for renminbi as an alternative to the dollar for international clearing and settlement services. 

While Zhou appears to have a mellow and friendly persona, he has been tough on corruption and proactive in his efforts to control and stabilize the Chinese financial system. As he entered his third and final term from 2013 to 2018, bitcoin came onto Chinese authorities’ radar as a potential source of instability. 

Tanvi Ratna, CEO of blockchain and crypto think tank Policy 4.0, said Zhou would see bitcoin’s anonymity as problematic, as Chinese citizens would transact in a way that is impossible to trace. “Before PBOC, Zhou was a capital market regulator and very anti-corruption,” she said. “In that sense he might be using digital currencies as a tool to help the banks crack down on corruptions by tracing illicit transactions.”  

Between 2000 and 2002, Zhou led the China Securities Regulatory Commission (CSRC), which is the top financial watchdog regulating the Chinese stock market. 

While heading the CSRC, Zhou was known as Zhou “Bapi” – the Flayer – because of attempts to crack down on corruption in nascent capital markets, according to a report by the Financial Times. The central banker also stressed the role of market mechanism and cutting through red tape that governs listed companies when he was the leader of the commission. 

In his speech this June, he called on the country to improve transparency, accounting standards and governance of listed companies as more entities are trying to go public in the home market while facing increasing regulatory pressure abroad. 

The year after the 2013 bitcoin restrictions, Zhou led the efforts to assemble a task force to study the possibilities of a national virtual currency. 

The digital yuan initiative soon gained more visibility among other China’s top policy makers. It was written into China’s 13th Five Year Plan in 2016. Approved by Beijing’s authorities, Five Year Plans are a series of social and economic initiatives that would shape the Chinese economy.

Meanwhile, the central bank invited a slew of experts from other countries, including consultants from Citibank and Deloitte, to help it understand the legal and technical frameworks for a national digital currency. 

In the conference, the central bank stressed it would be focused on problems such as money laundering, tax evasion and cross-border payments. 

By 2016, China was tightening its capital controls, facing and increasing pressure from international institutions to have the floating interest rate on renminbi and rapidly shrinking foreign reserves. That gave the digital yuan project greater impetus, as China seeks greater control over its financial affairs.

The central bank has imposed a $50,000 yearly foreign exchange cap, which will effectively make the money stay within the country to support the local currency. However, bitcoin could be used as a way to avoid China’s capital controls.  

In 2017, the PBOC barred crypto exchanges from fiat-crypto transactions and termed any promotion and marketing of cryptocurrencies illegal. The move essentially prohibited investors in China from buying bitcoins with renminbi. 

However, that does not mean China imposed a sweeping ban on bitcoin. The country has a more nuanced approach to keep cryptocurrencies in check while developing the digital yuan, Ratna said. 

Chinese investors can still buy bitcoin and other cryptocurrencies through over-the-counter (OTC) trading desks, where buyers can strike a deal with their counterparty once they are in agreement for a certain price. There are also a slew of crypto exchanges based in Hong Kong given the city’s more lenient regulations on crypto trading.

“The government is obscure about what they are doing with digital currencies on purpose because that is a way of waiting and guanging what will do well,” Ratna said. 

The central bank established the Digital Currency Research Institute in Shenzhen with a team of experts dedicated to developing a national digital currency for China at the end of 2016. It wasn’t made public until the next year. Zhou appointed Yao Qian, the deputy director of PBOC’s technology division to lead the institution. 

In the next two years, as Zhou was stepping down and the central bank was undergoing the transition to his successor Yi Gang, the national digital currency initiative remained largely out of the spotlight.

However, the Facebook-backed digital currency libra (now diem dollar), which would amplify the U.S. dollar’s dominance over the global financial system, spurred PBOC’s development on the digital yuan. If it gains popularity, the dollar-pegged token would be widely used in cross-border payment, and clearing and settlement services.

Zhou’s criticism of the dollar goes back a long way. In a 2009 essay following the 2008 financial crisis, he pointed out the supremacy of the U.S. dollar was a major factor in the world’s financial crisis and how China, which is one of the largest U.S. debt holders in the world, has been subject to the risks from the U.S. economy. 

“The outbreak of the crisis and its spillover to the entire world reflect the inherent vulnerabilities and systemic risks in the existing international monetary system,” Zhou said in the essay, noting the world needs a better alternative to the existing global reserve currencies. 

The bank revealed the technical framework and distribution model of its national digital currency to the public three months after Facebook’s announcement in June 2019.  Even after  retirement, Zhou kept studying and detailing plans to further develop DC/EP in his published articles. . 

Zhou, like many other China’s high-ranking policymakers who were born in the 1940s, did not study the subject involved in his government position. He graduated from Beijing University of Chemical Technology in 1975 and received a PhD degree in Automation and System Engineering from Tsinghua University in 1985. 

Before college, Zhou was a worker at the Production and Construction Corps in Heilongjiang province, which is China’s northernmost territory, from 1968 to 1972 during the Cultural Revolution. His father, Zhou Jiannan, was also a key policymaker, according to a report by the Financial Times. 

Zhou’s career took a turn in 1986 when he started working as a member of the Economic Policy Group of the State Council and deputy director of the Institute of the Chinese Economic Research. Zhou later took on multiple key roles in China's economic reform in the rest of the decade, according to the G30 bio. 

Zhou later led the State Administration of Foreign Exchange and served as the president of China Construction Bank, one of the four major state-owned commercial banks in China in the 1990s, where he oversaw asset management companies and was charged with reducing the Chinese banking system’s bad debt and managing the country’s foreign reserve. 

Zhou has a connection to western culture. He spent two years in University of California, Santa Cruz as a visiting scholar, and got along with central bankers from the west. The central banker has a PhD from Tsinghua University. 

Zhou advocated and put forward policies that support freer flow of capital across the borders after China joined the World Trade Organization. He backed a floating interest rate set by the market rather than controlled by the government. 

“The exchange rate regime reform will be carried out unwaveringly,” Zhou said during an interview with Caixin in 2016. “We are patient. We hope to see substantial progress in the exchange rate regime reform during the 13th Five-year Plan period, moving toward greater reliance on market forces and a more flexible exchange rate.”

One thing’s for sure: During Zhou’s tenure, the Chinese yuan gained prominence.. The Chinese yuan became the fifth currency included in the International Monetary Fund’s (IMF) special drawing rights (SDR), which acts as foreign exchange reserve assets, in 2016. The other four currencies are the U.S. dollar, Japanese yen, euro and the U.K. pound sterling.  

Some argue there are limitations on Zhou’s influence over China’s economic policy given his connection to the West and academic background,according to New York Times reporter Neil Irwin’s book “The Alchemists: Three Central Bankers and a World on Fire.”

"Within the PBOC, Zhou Xiaochuan has a very high authority," said one former official of the central bank. "But outside the financial system, he lacks – I wouldn’t call it ‘ability,’ but the ‘style’ of how traditional Chinese bureaucrats take care of things in the process of interfacing with other ministries and crafting policy, according to the excerpt of the book in the magazine Foreign Policy. 

Other central bankers knew of Zhou’s limited authority to put forward coordinated policies because these policies must be approved by high political authorities, according to the book. In other words, he does not have the power to act on his own, but this is not necessarily unusual for government officials in China. 

The State Council would have the final word on many such policies. It signs off on routine adjustments to interest rates, banks’ reserve requirements and exchange rate management. 

During an annual meeting with the IMF and the World Bank in 2010, Zhou said China would not increase its interest rate that year. Yet, in less than two weeks, the Chinese central bank raised the rate by a quarter percentage point. While the media accused Zhou of trickery, it was more likely the authorities had not informed him when they made the decision, according to the book.  

See also: Tanvi Ratna – China’s Digital Yuan Blurs the Lines Between CBDCs and Crypto

During his three five-year terms, Zhou’s liberal and market-oriented approach has occasionally drawn criticism in China. But Zhou would perhaps argue that this is a small price to pay. 

“The leader of the central bank should have the courage and wisdom to make the right decisions even if they are unpopular,” PBOC’s current head, Yi Gang, said in a speech. “The PBOC that is not criticized by the public will not withstand the test of history.”