Written by: Lin Wanwan, Beating
On January 15, 2014, Yu'ebao's 7-day annualized yield surged to 6.763%. On the same day, the interest rate for bank demand deposits was 0.35%.
19 times.
This figure hit like a ton of bricks, waking hundreds of millions of depositors in China: it turns out that the interest on my money in a bank savings account was being eaten up by 19 times. It's not that there was no interest at all; it's that someone else was taking it.
What is the essence of Yu'ebao? It simply pools depositors' money and deposits it into a bank's negotiated deposit account: a world without interest rate controls, and then distributes the returns to depositors.
While technically uninnovative, it opened a hidden crack in China's financial system: for the first time, ordinary people discovered that their money has time value, and that this value rightfully belongs to them.
Eleven years later, on December 29, 2025, the People's Bank of China announced that starting January 1, 2026, interest would be paid on the balance of digital RMB wallets.
It's still about "making digital money generate more money," but this time the player has changed—the central bank.
Interest calculation is an entry ticket, proving that the digital yuan has finally figured it out: being "correct" is not enough; users need to have a reason to choose you.
The dilemma of "theoretically correct"
The digital yuan began its pilot program in 2019. Six years later, the figures are quite impressive: 230 million personal wallets, 3.48 billion transactions totaling 16.7 trillion yuan. But ask the people around you, how many actually use it in their daily lives?
The most likely answer is: I received the red envelope, tried it once, and then nothing happened.
Where is the problem? It lies in a term that sounds very academic: M0.
The central bank initially positioned the digital yuan as a "digital substitute for cash." Cash is M0, currency in circulation, and does not accrue interest. Therefore, the digital yuan also does not accrue interest. The logical chain is perfectly self-consistent. However, the problem is that the use cases for cash are disappearing.
Before 2019, mobile payment penetration in China already exceeded 85%. Open WeChat or Alipay, scan, and it's done in a fraction of a second. Asking users to switch to a new tool just for a "dual offline payment" (paying without internet) feature is far too costly. How many everyday situations require immediate payment without internet access?
Even more critically, the positioning of M0 has created a structural problem: banks have no incentive to promote it.
The concept of 100% reserves means that for every 100 yuan a user deposits into a digital yuan wallet, the bank must deposit 100 yuan as reserves with the central bank, and cannot touch a single penny. The bank bears all the costs of developing the system, maintaining the network, and promoting it to users, but doesn't earn a single penny from those 100 yuan. I bear the costs, but I make no profit. This is a bad deal no matter how you look at it.
So, despite six years of pilot programs for the digital yuan, numerous scenarios, red envelopes, and activities, a spontaneous network effect has yet to emerge. Users lack the motivation to hold the currency, and banks lack the motivation to promote it; with neither side working, the wheel simply won't turn.
What changed this time: from M0 to M1
On December 29, 2025, the People's Bank of China released a document with a very long title: "Action Plan on Further Strengthening the Management and Service System and Related Financial Infrastructure Construction of Digital RMB". The document is long, but the core change is only one sentence: the digital RMB has changed from "digital cash" to "digital deposit".
The document mentions three key changes:
First, interest calculation. Starting January 1, 2026, the balance in your digital RMB wallet will accrue interest at the current deposit rate. Currently, the current deposit rate is approximately 0.05%, meaning 10,000 RMB deposited for a year would earn 5 RMB. The interest may seem small, but the change from 0% to 0.05% represents a significant improvement.
Second, bank liabilities. Previously, the digital yuan was a liability of the central bank, just like the paper money in your pocket. Now it has become a liability of banks. Banks can include this money in their balance sheets for lending and investment, making profits in the process. Of course, reserves must be paid, but no longer at 100%.
Third, deposit insurance. The digital yuan is included in the deposit insurance coverage. Your money is protected by the national credit, just like ordinary deposits.
The original words of Lu Lei, the deputy governor of the People's Bank of China, were: The digital yuan has "moved from a cash-type 1.0 version to a deposit-type 2.0 version".
In layman's terms: The digital RMB in your wallet is finally starting to have time value.
However, the 0.05% interest rate is almost negligible. But the significance of this change goes far beyond that small amount of interest.
First, it solves the problem of "why hold it".
For the past six years, the promotion of the digital yuan has relied on "subsidies in exchange for trial use." This involved sending red envelopes, organizing events, and offering coupons. Once used, it was forgotten because holding it offered no benefit—it didn't earn interest, and it was more convenient to keep it in WeChat Wallet (although it also didn't earn interest, at least it was easy to use).
Things are different now. Even 0.05% means "it's better to have it here than in your pocket." Mu Changchun, director of the Digital Currency Research Institute of the People's Bank of China, said at this year's Bund Conference: "Letting ordinary people and enterprises hold idle, non-interest-bearing assets will cause the time value of money to be lost."
Currency should naturally have time value; not accruing interest is a design that goes against human nature.
Secondly, banks finally have an incentive. The positioning of M1 means that banks can conduct business using digital yuan. When users deposit money, banks can lend it out, invest it, and earn interest spreads. With rights and responsibilities aligned, their enthusiasm naturally increases. This is the most crucial underlying logic of this reform.
Third, it is the first major economy in the world to award interest on its CBDC. More than 130 countries and regions worldwide are exploring central bank digital currencies (CBDCs), but the vast majority still view them as "digital cash." This is because awarding interest on CBDCs is theoretically controversial (would it lead to bank runs?) and carries operational risks.
China's move provides a new benchmark for the evolution of global CBDCs.
Pre-determined rules for the use of currency
Beyond the aspect of "interest accrual," the potential of the digital yuan is even more worthy of discussion. Traditional deposits are simply numbers lying dormant in an account, static and unchanging.
The digital yuan is a string of code that can be assigned rules. The central bank's white paper states that it achieves programmability by loading smart contracts that do not affect the function of the currency.
To put it another way: the digital yuan can also be "conditional money".
In past pilot programs, digital RMB red envelopes had an expiration date and became invalid after that, which is a basic application of programmability.
The potential for future applications is vast. Government-issued consumption vouchers can only be used in specific industries, are automatically reclaimed after expiration, and are fully traceable; a certain percentage of wages paid by companies can be automatically transferred to pension accounts; payments for cross-border trade are automatically settled upon fulfillment of delivery conditions, eliminating the need for manual reconciliation; funds for targeted poverty alleviation can only be used to purchase means of production and cannot be used for gambling or high-end consumption.
What these scenarios have in common is that the rules for using currency can be preset and then executed automatically.
In the past, the central bank relied on "aggregate tools" to regulate the economy—interest rate cuts, reserve requirement ratio reductions, and quantitative easing. The problem was that the transmission chain was too long. Money came out of the central bank, passed through banks and enterprises, and finally reached the real economy, resulting in huge losses in between, and it was difficult to target specific sectors. Economists call this "time lag and leakage in monetary policy transmission."
The programmability of the digital yuan theoretically allows for "precision drip irrigation" of monetary policy. The central bank could stipulate that this money can only flow to small and micro enterprises, can only be used for green investments, and can only be spent within 6 months.
This is something that traditional currencies cannot do.
Of course, there are two sides to every coin. If currency can be programmed, who decides the rules? Could programmability become another form of control? Would freedom of consumption be restricted? There are no standard answers to these questions, but they will certainly become the core debates of the next phase.
Domestic affairs are one game, cross-border affairs are another.
The Multilateral Central Bank Digital Currency Bridge (mBridge) has entered the MVP stage. This project is a joint effort by the Digital Currency Research Institute of the People's Bank of China, the Hong Kong Monetary Authority, the Bank of Thailand, the Central Bank of the United Arab Emirates, and the Bank for International Settlements. In 2024, the Central Bank of Saudi Arabia also joined.
As of November 2025, mBridge had processed 4,047 cross-border payments, totaling RMB 387.2 billion, of which digital RMB accounted for 95.3%. Each transaction took 6 to 9 seconds to settle, with costs more than 50% lower than traditional cross-border payments.
These figures demonstrate that the technology has proven successful. However, its scale is still small, and it is far from becoming a mainstream cross-border payment channel.
The core issues of cross-border payments are trust and rules. The US dollar's status as the global reserve currency is not solely due to the size of the US economy, but also to the historical legacy of the Bretton Woods system, the network effect of the SWIFT system, and the depth and liquidity of the US financial markets.
For the digital yuan to make a mark in the cross-border field, technology is just the first step; there is a long series of geopolitical equations to solve.
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Interest calculation addresses the question of "willingness to hold." But holding is only the first step; there are more difficult hurdles to overcome: Will people be willing to use it? Will merchants be willing to accept it? Can a spontaneous network effect be formed?
With an interest rate of 0.05%, the leverage effect is limited.
Looking back at 2014, Yu'ebao relied on a 19-fold interest rate spread to awaken the financial awareness of hundreds of millions of people overnight, forcing banks to reform and forcing interest rate liberalization. That was a game-changer.
The digital yuan currently offers virtually no interest rate advantage and cannot leverage interest rate differentials. It needs to find other breakthroughs, such as a better product experience, more diverse usage scenarios, or stronger policy support.
Ultimately, currency is used, not designed.
In 2014, Yu'ebao used a 19-fold interest rate spread to tell Chinese people: your money should have time value.
In 2026, the digital yuan will accrue interest, which is a continuation of this logic: for the first time, the money in a digital wallet will have a reason to be "worth keeping there".
But a deeper change is that when currency becomes digital and programmable, the value of time can be set, allocated, and even controlled more precisely.
Who sets the rules? How are the profits distributed? Who bears the risks? These questions are likely far more important than whether or not interest should be accrued.
The digital yuan has just received its entry ticket. The real competition has only just begun.
