(Yicai Global) Oct. 30 -- China tested its digital currency in the economic powerhouse of Shenzhen earlier this month, impressing consumers and vendors. The e-money will allow banks to regain control of money flow data and facilitate international trade, according to a report by YiMagazine.

CNY10 million (USD1.5 million) of virtual Chinese yuan was circulated in Shenzhen during the week Oct. 12 to Oct. 18. Some 50,000 residents and 3,389 stores participated. The data generated was collected by the People’s Bank of China’s Digital Currency Research Institute.

“I won CNY200 (USD30) in a virtual red packet,” exclaimed Chen Xiaofu. “I spent it on refueling the car,” he said.

But only a few outlets accepted the new e-yuan, he said. “I went shopping in Luohu District but it took me a long time to find a restaurant where I could use crypto cash,” he added.

Payment is made by scanning a QR code generated by a mobile app, similar to popular online payment platforms Alipay, run by e-commerce giant Alibaba Group Holding, and WeChat Pay, operated by internet behemoth Tencent Holdings, said Zou Ling. Only the vendor can scan the buyer’s code at the moment. The other way round is not possible yet.

If it becomes more widely used, Chen might switch to the digital yuan rather than use Alipay or WeChat as his smartphone is overloaded with apps, he said.

Businesses were also keen to try it out. The Digital Currency Electronic Payment system is legal tender and cannot be refused by any business or individual in China.

Staff from the Bank of China helped one of its clients, a restaurant in Luohu district, to upgrade its electronic cash registers to use the digital yuan, an employee said. The restaurant served more than a dozen customers who paid with e-money and all went smoothly.

“Security is not an issue. It’s backed by the nation,” he added.

However, the system did not work so well at a Wal-Mart store. The US hypermarket chain’s China headquarters upgraded the Point of Sales systems and self-service cash registers in all its outlets, but some failed to reflect payment even after the money was deducted from customers’ accounts, an employee told YiMagazine.

Greater Role for Banks

The digital currency is also a great opportunity for conventional banks to reassert themselves on the mobile payment scene, which has been monopolized by third-party payment companies. This is not because the banks lack the technology, but rather that they are confined to financial services and are not part of lifestyle payment scenarios.

A substantial part of Alipay’s business comes from its parent firm Alibaba’s e-marketplaces. CNY118 trillion (USD17.6 trillion) was channeled through Alipay in the 12 months ended June 30, accounting for 58 percent of all China’s mobile payments over that time period, according to operator fintech giant Ant Group.

It will also allow banks to regain control of payment data. Banks tend to lose track of funds once supplied to third-party-payment platforms. If they lend directly, however, they will own this information. They will be able to find out where each and every loan goes in order to avoid situations where credit card users speculate in real estate or on the stock markets.

Less Risk for Exports

China’s digital currency will first be used in general retail scenarios instead of cash, according to a banking insider. Once mature, the central bank will use the digital currency in large capital transactions on the financial markets.

The next step will be the internationalization of the e-yuan. The digital currency can help reduce some of the risks in international trade. Bank transfers can be dicey if exported commodities do not meet the quality agreed. However, e-money can be tied to smart contracts, which will ensure that payment is made even after the receipt of the goods so long as they meet the agreed requirements.

Shenzhen was probably used as a testing ground for the e-yuan because, as part of the Guangdong-Hong Kong-Macau Great Bay Area, there are many application scenarios for cross-border payments, the banking insider said.

YiMagazine is a monthly publication under Yicai Media Group, China's largest financial media conglomerate.

Editor: Kim Taylor