China is the world leader in e-commerce and e-money and is poised to be the driver in a related area of financial innovation, digital currency. While private sector advancement has stimulated the former, the latter is a concerted public project of the People’s Bank of China (PBOC).
China’s ability to adapt and integrate private and public sector developments along with local, national, and global platforms will decide how effective these current trends become. The ramifications progress from mere efficiencies of daily purchases to global balance of power politics.
Thus, in these two pieces, I first explore some of the financial trends occurring within China in the private and public domain, and second, the impact of financial innovation on international relations.
Financial market opening has greatly benefited quality of life in China, driving innovation and rapidly enhancing China’s global clout. For Western countries, innovation in China simply meant opening to Western financial service firms. Yet China has guarded that opening, holding foreign firms at abeyance, while allowing greater domestic competition.
Now that China’s economy is maturing and opening on its own terms, Chinese innovation in the fintech sector is spurring reactions in other countries, sometimes closing themselves off from China. Managed access has allowed China to achieve both private sector and public sector advancement in financial technology and innovation.
In a mere decade, Chinese society has totally transformed from a consumer of foreign technologies to a leader in patents. In a few short years, China has become a near cashless economy so it is hardly surprising that its fiat currency would not evolve into digital form as well.
The story really begins in the private sector, with revolutionary companies like Alibaba and Tencent. Although mobile payments began in the United States, their adoption there has been relatively slow as credit card companies like Visa and Mastercard remain dominant.
Meanwhile, though Alipay launched in 2004, the Chinese government’s experimental decision in 2014 and 2015 to allow licenses for private banking generally and online private banking specifically with test cases in Guangdong, Shanghai, Tianjin, and Zhejiang catapulted Alibaba (via its spin-off Ant Financial) and Tencent e-commerce and e-money industries to the forefront of change.
These private fintech companies have overwhelmed the “dumb pipes” of bureaucratic and slow-moving traditional banks, both state-owned and private, bringing speed and accessibility to all, particularly rural and poor populations, and connecting to customers by building from the ground up what people want, or need, or will use.
Zhuhai Hengqin International Financial Center under construction and Hengqin new area financial island in south China’s Guangdong Province. /Xinhua
Thus, they have designed and leveraged integrated platforms that run the gamut of services, linking ecommerce with a social networking app (Tencent/WeChat) or with a business-to-business (B2B) and business-to-consumer (B2C) model (Alibaba).
This transformation to a world of private e-commerce took about two years in the relatively hands-off domestic financial sector regulatory environment. Today, Chinese mobile payments are 50 times larger than in the United States. China is the largest market for financial technology companies and start-ups; according to Accenture, in 2018, fintech deals in China were worth over 25 billion U.S. dollars, equal to half of all fintech investments globally.
The Chinese government has been instrumental in advancing these financial innovations, both with its aforementioned decision to maintain reform and opening economic policies but also to invest in its own public policy priorities, namely the central bank digital currency (CBDC) and the Cross-Border Inter-Bank Payments System (CIPS). China is essentially the first country in the world to have its own national electronic money.
National digital currencies have some advantages: they provide access to people in places that are poor or underdeveloped, they can adjust quickly and efficiently to manage interest rates and the money supply, and they reduce the cost to maintain fiat cash and coins. They also prevent the chaotic reality of competing private currencies, what the European Central Bank referred to as “the evil spawn of the financial crisis.”
Bitcoin is the largest of several alternative private currencies that wildly fluctuate in value and operate in a regulatory netherworld. Facebook’s Libra is the latest foray into the crypto-currency market, tying itself primarily to the U.S. dollar, along with the euro, Japanese yen, British pounds sterling, and interestingly the Singaporean dollar; the Chinese yuan consciously and conspicuously absent.
China, Europe, and many other countries have opposed the American social media behemoth’s intrusion into global finance; ironically so does the U.S. government which has basically turned off the deal and largely curtailed the initiative while indicating it has no plan to move forward with its own digital currency.
Digital currencies have several distinct public policy benefits. First, its electronic tracking is a major force for combating corruption and money laundering, thus it will greatly reduce crimes associated with bribery and embezzlement or funding illegal activities to non-state actors that use terrorism.
Second, governments will be able to dramatically prevent tax evasion and better enforce the collection of tax receipts. Of course, such innovations come with potential costs. Privacy is directly threatened when all transactions are digitally recorded, whether by a private firm or public agency. Guarantees of anonymity should be part of the software as such dramatic technologies roll out.
Likewise, traditional commercial banking is challenged by such ventures, so public-private partnerships must govern this transition to ensure transparency and fair competition. Moreover, not all propositions succeed in the reality of a competitive and open market; for instance, person-to-person (P2P) lending has so far failed to take off.
Ideas, models, and businesses will come and go, yet government is still necessary to manage a fair and rules-based regulatory framework and ensure a secure social safety net.
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