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The Trump administration plans to sign a phase one trade agreement with China this week. As part of the deal, the Treasury Department has dropped its allegation that China manipulates its currency. However, there is another currency battle on the horizon. China is preparing to test a new digital version of its currency, and some observers tell NPR's Scott Horsley this could be the beginning of a new economic arms race challenging the supremacy of the U.S. dollar.
SCOTT HORSLEY, BYLINE: China is already light-years ahead of the U.S. in eliminating old-fashioned paper money.
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HORSLEY: Research fellow Martin Chorzempa, who's with the Peterson Institute for International Economics, says more than a billion Chinese consumers have gotten used to paying for purchases without cash, using popular smartphone apps like WeChat and Alipay.
MARTIN CHORZEMPA: Everything is immensely convenient, and you pretty much only need these two apps to do just about anything. You walk into a restaurant, scan a code and order your food. You don't have to wait for a waiter. All the payments are automatic. It's quite extraordinary.
HORSLEY: China's counterparts to Amazon and Facebook took the lead in this process. Chief strategist Patrick Chovanec of Silvercrest Asset Management says the companies leapfrog their U.S. competitors out of necessity because China didn't start out with a well-established payment system built on credit cards.
PATRICK CHOVANEC: When Amazon started, it wasn't a major challenge to figure out, well, how are people going to pay for the books that they order? Whereas with China, a lot of people didn't have credit cards, so they had to come up with ways to facilitate their customers doing this.
HORSLEY: Now that tech companies have paved the way, China's central bank wants a piece of this digital action. Chorzempa says the bank's been working on a digital currency for the last six years. But the effort shifted into overdrive when Facebook CEO Mark Zuckerberg unveiled plans for his own electronic form of money called Libra.
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MARK ZUCKERBERG: The idea behind Libra is that sending money should be as easy and secure as sending a message.
HORSLEY: China's central bank worried that if nearly 2.5 billion Facebook users suddenly had their own electronic currency, China's digital money could be left in the dust. The bank raced to complete design work and is now reportedly preparing for the first pilot test of its digital currency. Chorzempa says the digital yuan will function more like its paper cousin than a cryptocurrency like bitcoin. Its value is tied to the regular yuan, so it's expected to be relatively stable. And the central bank will be able to monitor every transaction, so it won't have bitcoin's anonymity.
CHORZEMPA: Actually, the term that the central bank officials in China have used is controllable anonymity, which is one of the most Orwellian statements one could think about.
HORSLEY: If China stepped on the gas following Facebook's announcement, regulators in this country hit the brakes. Federal Reserve Chairman Jerome Powell warned Facebook's currency will need serious vetting before it goes forward. Zuckerberg pushed back, casting the currency race as an international competition.
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ZUCKERBERG: China is moving quickly to launch a similar idea in the coming months. But if America doesn't innovate, our financial leadership is not guaranteed.
HORSLEY: Princeton historian Harold James, who co-authored a paper on digital currency, says Zuckerberg has a point.
HAROLD JAMES: We're right at the edge of a kind of gigantic technical change.
HORSLEY: James sees a possibility that China's new digital currency could come to rival the dollar as an international means of payment. Other observers, like Erik Nelson of Wells Fargo Securities, are more skeptical.
ERIK NELSON: We're still in the really early stages of this.
HORSLEY: Nelson says the Federal Reserve is wise to proceed cautiously. Digital currencies could make financial transactions cheaper, easier and more efficient. To the extent they catch on, though, they could also trigger an upheaval in the global financial system, regardless of whether they're sponsored by an American tech giant or the Chinese central bank.
Scott Horsley, NPR News, Washington.
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