The People’s Bank of China is hoping its new digital currency will reduce the dominance of Alibaba and Tencent in digital payments, according to several people familiar with the thinking of the central bank.

The experimental digital currency is on trial in a number of Chinese cities and the PBoC intends to use it to simplify digital payments and interbank settlements.

Regulators and executives at Ant, Alibaba’s financial affiliate, said PBoC officials have Alipay and WeChat Pay, the dominant digital payments platforms, firmly in their crosshairs.

“It is about the role of a digital currency for domestic retail use,” said a senior executive at the Hong Kong Monetary Authority familiar with the thinking at the PBoC.

“They want a more level playing field for the banks. Retail payments are so dominated by Alibaba and Tencent while banks are less active in electronic payments.”

In the first quarter of 2020, Alipay had 55.4 per cent of China’s mobile payment market, according to Beijing-based iResearch, which estimates mobile payments will reach Rmb140tn ($19.9tn) this year.

The arrival of the PBoC’s digital currency comes as Ant, which controls Alipay, is seeking a dual listing in Hong Kong and Shanghai. But the extent of its future support from Beijing is unclear.

The head of Asian economic research for one large international bank noted that Zhou Xiaochuan, the former PBoC governor, had allowed Alipay and Tencent’s WeChat Pay “to grow into monsters”.

“They got special love from the PBoC,” the person said. “All the banks and the CBRC (China Banking Regulatory Commission) complained. Now it is incredibly difficult to rein them in.”

A senior Ant executive said his company and Tencent are “both part of the discussions” regarding the digital currency. “In principle, we are supportive. But digital is still a small part of payment. The speed of growth though is because of what Ali and Tencent have done.”

Alipay has filed patents related to its role as a likely secondary issuer of the new digital currency, according to a recent study from Brookings Institution.

But “by leaving user-facing activities to banks, the [digital currencies and electronic payments] will avoid disintermediating the financial system. They also place a strong emphasis on compatibility with existing banking infrastructure,” the Brookings study added.

The Ant executive added that China Unionpay, which handles bank card payments, “is way larger than us” and that his company helps small businesses and other users whose “needs are under-addressed by financial institutions”. UnionPay’s total transaction volume last year was Rmb189tn.

A senior executive at WeBank, the Tencent payments affiliate, said WeChat Pay and Alipay must post capital adequacy reserves with the PBoC that are “already very demanding”.

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The digital currency, if successful, is expected to change the financial landscape dramatically, and could be used for cross-border payments with trading partners including Hong Kong.

Several observers predicted the experiment will hasten the internationalisation of the renminbi and erode the status of the US dollar as the world's only reserve currency.

But today, “China is cautious about domestic financial stability,” said the HKMA executive. “They will relax capital controls and internationalise in a gradual way so the US is not the only dominant currency. Over the past year, the PBoC has changed its tone about local currency usage within the region and about the use of yuan assets for central banks.”

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