Fintech and “China’s Reinvention of Money” – The Diplomat
Diplomat author Mercy Kuo regularly engages subject matter experts, policy practitioners and strategic thinkers around the world for their diverse insights into US Asia policy. This conversation with Martin Chorzempa ̶ senior fellow at the Peterson Institute for International Economics and author of “The Cashless Revolution: China’s Reinvention of Money and the End of America’s Domination of Finance and Technology” (Public Affairs 2022) – is the 348th in “The Trans -Pacific View Insight series.”
Identify the key components of China’s fintech revolution.
Fintech transformed a backward financial system into a world-leading user of technology. It started with online payments, which tech companies had to invent on their own because China lacked the practical credit card system we take for granted. But payments then became the basis for building super apps that merged just about everything you can do with a bank, like invest and get a loan, with an entire ecosystem of online and offline services. Think of your mobile banking app plus Venmo, Messenger, Uber, Twitter and Kindle all in one.
What are the elements and effects of China’s economic repression?
Financial repression meant a state-dominated financial system with limited competition and choice, all designed to channel people’s savings into banks at low interest rates, allowing cheap loans to flow to state priorities. Often the return on deposits was below inflation! It was very monopolistic with little pressure to innovate. Fintech disrupted this system, leading to competition that led banks to shape up and offer better services to compete.
Explain the connection between China’s social credit system and the breakdown of financial risk.
Both stem from a major shift in Xi Jinping, including both increased risk aversion and a desire to increase government oversight of the economy. Social Credit seems dystopian, but its roots come from an attempt to solve real problems, like a surprising inability to enforce court judgments. The crackdown on risk similarly stems from legitimate concerns that widespread financial crime created major risks of financial crisis that needed to be mitigated. Both can be taken too far, as we have seen with social credit as punishments spread and became more draconian, such as bans from planes and trains used on journalists who got into trouble for their reporting.
Explore the overseas reach of China’s fintech.
Indeed, it has been surprising how limited the reach of Chinese fintech abroad has been despite their huge domestic success, abundant capital, data and advanced technology. Chinese tourists and students in dozens of countries can pay with Alipay and WeChat Pay, but they have largely failed to gain users overseas.
In part, this is due to classic business difficulties – adapting to a foreign market other than China, where American companies such as WhatsApp managed to beat WeChat in the social media market. To a large extent, however, they have come up against national security concerns, particularly around the access to sensitive data of foreign nationals that could afford to use a super app.
Consider how China’s cashless revolution is ending America’s dominance of finance and technology.
The flow of ideas in fintech has reversed, with knock-offs in China now leading in key areas of innovation, inspiring Silicon Valley titans such as Mark Zuckerberg and Elon Musk. The US still has huge advantages, but it cannot be complacent as Chinese companies become more competitive internationally and geopolitical concerns such as sanctions lead many countries to explore alternatives to the current USD-based system.
