A super app like he sees in China that allows us to analyze
our activity on social networks and, thanks to the results of that analysis,
decide how much money we can borrow from him. How those super-apps came about
in China is described in the book discussed here:
The Cashless Revolution"The Cashless Revolution
By Martin Chorzempa
(PublicAffairs, 301 pages, $29)
The days of hard cash may be numbered. Having invented paper money more than 1,000 years ago, China is now leading the charge into credit-card free online payments. It is also developing its own digital currency, one that could allow the state to observe and control every financial transaction. Martin Chorzempa's "The Cashless Revolution" engagingly describes this state of affairs and, along the way, presents a cautionary tale, since dozens of countries around the world are contemplating the launch of their own digital currencies.
Mr. Chorzempa, a fellow at the Peterson Institute for International Economics, explains how the People's Republic found itself, from the turn of the century, at the cutting edge of finance. The underdeveloped state of consumer finance in China proved advantageous, accelerating the adoption of the latest technologies. Western countries had been using credit cards for several generations, but in China cash was still king. The country's state-controlled banks offered poor customer services and paid little by way of interest on deposits. A credit-card payments system, UnionPay, a monopoly part-owned by the People's Bank of China, was launched only in 2002, and it was slow to provide payment services to the nation's fledgling internet companies.
Tencent, a Shenzhen-based social-networking firm, found a way around this problem. In 2002, it launched a virtual currency, known as QQ coin, that could be used to pay for its gaming services. The following year, Alibaba, a rapidly growing e-commerce site run by Jack Ma, introduced its own online payments system, Alipay. Alibaba's customers were able to link their bank accounts directly to Alipay.
Beijing helped the evolution of China's financial technology, or fintech, by not standing in the way. Instead fierce competition between Tencent and Alibaba drove innovation, notably the adoption of QR codes (a technology invented in Japan to track factory inventories) for digital payments. The central bank initially took a hands-off approach. Foreign credit-card companies were kept out of China, but foreign investors were allowed to provide Tencent and Alibaba with capital, often by way of "work-arounds," Mr. Chorzempa tells us, that funneled foreign money through "holding companies located offshore." Mr. Ma also cultivated political connections. Among his early investors were the son of premier Wen Jiabao and a grandson of former president Jiang Zemin.
The financial-technology revolution was further assisted by the rapid adoption of smartphones in China, creating a vast domestic market for mobile payments. Tencent and Alibaba turned themselves into "super-apps," one-stop shops catering to all their customers' digital needs. In 2013, Tencent introduced its immensely popular WeChat Pay, which enabled its social-media users to send cash to one another.
In the same year, Alibaba launched an investment vehicle called Yu'E Bao paying three times more interest than was typically offered on bank deposits. Yu'E Bao (which translates as "leftover treasure") soon became, according to Mr. Chorzempa, "the largest money-market fund in the world." Tencent and Ant Financial, the name given to Alibaba's financial-services division that was separated from the parent, also opened online banks. Ant's virtual credit card Huabei ("Just Spend") expanded rapidly in the mid-2010s, a time when household borrowing was booming.
By October 2020, ahead of its planned initial public offering, Ant was valued at $330 billion -- on par with the mighty JPMorgan Chase. At a Shanghai convention later that month, Mr. Ma delivered an astonishingly ill-judged speech in which he extolled financial innovation and criticized the stifling effect of financial regulation. His argument may have been sound, but Beijing didn't take the challenge lying down. Ant's IPO was canceled, new regulations were imposed and Mr. Ma briefly disappeared from public view. His "aura of untouchability crumbled," Mr. Chorzempa writes.
In retrospect, the eclipse of privately run Chinese fintech appears inevitable. Under President Xi Jinping, China had already taken an authoritarian turn. Swashbuckling financial tycoons (known as "crocodiles") faced arrest and the dismantling of their business empires. Widespread fraud among local peer-to-peer lenders had given fintech a bad name and produced calls for more regulation. Mr. Xi was also seeking to restrain the explosive growth of debt in China.
Besides, Ant and Tencent possessed something that greatly interested the president -- namely, an apparatus for overseeing the online lives of hundreds of millions of Chinese citizens. Both companies had developed credit-scoring systems based not just on financial activities but on everything they knew about user behavior: hobbies, spending habits, even personal relationships.
On a visit to Tencent's headquarters in 2012, Mr. Xi was struck by the "abundant data" gathered by the firm, asking its boss: "How do we adapt the internet to manage society?" We know now that Mr. Xi's own answer was to develop a social credit system, which uses information technology to control the actions of refractory Chinese nationals -- preventing them from taking high-speed trains or traveling abroad, for instance. When Covid struck in early 2020, fintech was adapted to facilitate lockdowns and issue individualized stay-at-home orders.
Where will this cashless revolution take us? As Mao's premier Zhou Enlai said of the French Revolution, it's too soon to say. Mr. Chorzempa appears to be of two minds. He suggests that Chinese fintech poses a threat to Western payments systems while acknowledging that Tencent and Ant have made little progress outside their home turf. Nor is he sure whether financial technology represents a liberating force or a "privacy nightmare."
Friedrich Hayek once said that money was "one of the greatest instruments of freedom ever invented by man." A centralized digital currency may turn out to be the most effective instrument for social control ever created.
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Mr. Chancellor's latest book is "The Price of Time: The Real Story of Interest."” [1]
1. They've Got Your Number
Chancellor, Edward.
Wall Street Journal, Eastern edition; New York, N.Y. [New York, N.Y]. 14 Nov 2022: A.17.
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