Meinung

Why We Should Not Worry About the Digital Yuan

Or maybe we need to worry, but not for the reasons you think. The digital yuan is one more way in which China, still unable to achieve a level of international power commensurate with its economy’s size, is folding its hand and cashing in its chips.

Anne Stevenson-Yang
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In an April 4 op-ed for Bloomberg, the economist Niall Ferguson ominously warned that China is «minting the money of the future.» That suggests that the digital yuan is an innovation coined virtually by an unstoppable Chinese mint-of-the-future, having something to do with internationalizing the yuan and harboring some mysterious power that will dethrone the dollar.

It doesn’t, hasn't, and won't.

Ever since the «reform and opening» of 1979, the world has hoped that massive dependence on trade and foreign investment would force China to integrate with law-based international institutions. Instead, for its 40 years of expanding trade, China created special-purpose interfaces with those institutions that might be compared with carrying Google Translate on a trip to the market in Vietnam: the tool is not going to enable deep communication with the vegetable vendor, but you can use it to settle on a price for the tomatoes. Domestic institutions have hardly been touched since 1979. Instead, China has carefully crafted investment, regulatory, and public-relations moves that have strengthened the asymmetry of external trade and investment realities, penetrating overseas markets while protecting the home front.

It is notable that China vowed a decade ago to make the Renminbi convertible, as part of the effort to designate the Renminbi a reserve currency at the IMF, after which many believed that international trade settlement would shift into yuan. Certainly, after the global financial crisis, China's leaders spoke loudly about the necessity of replacing the dollar, if not by the yuan, then by a Special Drawing Rights (SDR) currency or the like.

While repeatedly and generally stating that the yuan would be made convertible «at an appropriate time,» in late 2015 when China began its preparation year for inclusion of the yuan in the SDR, it specifically committed to making the yuan convertible by the formal inclusion date of October 2016.

Five years later, that still has not happened. China did not bring its currency any closer to convertibility, but it did move the convertibility and internationalization discussion into the shade, toward «innovation,» with even vaguer references to international use.

As the strategy of building special-purpose interfaces with international institutions reaches the end of its useful life, China is seeking to withdraw from the broader world legally, economically, and socially. The data collection role of the digital yuan, completely centralized in the recently established clearance monopoly called NetsUnion, is part of that, and shows the trend is toward greater control at the expense of the private firms in finance that actually innovated and popularized electronic payments on the Mainland.

When Alipay and WeChat Pay came along, they whisked trillions of Renminbi in quarterly payments from the banks and into privately owned wallets. The People’s Bank of China (PBOC) initiative to create a digital currency represents the Chinese government’s determination to reclaim mastery over the realm of all financial transactions that occur within its borders.

Myths of Innovation

The first red herring to discard is the widely held idea that the rapid digitalization of payments in China is amazingly innovative and technically impressive. Ferguson repeats this bromide as delivered wisdom: «As is well known, China has led the world in electronic payments, thanks to the vision of Alibaba and Tencent in building their Alipay and WeChat Pay platforms.»

When AliPay was founded, in 2003 (five years later than its model, PayPal, which was well established at the time of acquisition by eBay in 2002), Chinese people universally had to line up every month at the bank to pay their mortgages and cell phone bills. Rich people sent drivers and assistants to line up. There were no personal checks, no credit cards, and few debit cards, which had to be physically presented. ATMs emerged in 2000. By 2004, 1% of Chinese had a credit card. Cash-and-carry was the only practical option.

Compare that to the United States:

  • Personal checks were first issued in 1880.
  • Trading stamps, such as the S&H Green Stamp and the Eagle Stamp, early versions of loyalty programs, had a nominal cash value and were sometimes used in lieu of cash before credit cards became common. Arguably, trading stamps, which were issued by thousands of retailers, were as much of a challenge to the dollar as bitcoin is now.
  • The first credit card was issued in 1950. Visa was formed in 1976 and Mastercard in 1979.
  • Debit cards were first issued in 1978 and became common in the 1990s.

By 2000, did anyone in the U.S. go to a bank to pay for utility bills or other recurring obligations?

AliPay and WeChat Pay began to take off largely as a result of smartphone penetration and the fact that the state-owned bank quadropoly had taken no steps at all toward customer convenience other than to build more branches. By that time, U.S. and European consumers had long ago left cash behind. The world did not convert to Apple Pay or Google Pay because these systems lack innovativeness but because no one saw much need. And that is why China's prevailing electronic payment systems do not gain traction in mature economies.

Banks and Politics

The second red herring is the idea that a digital yuan presages China’s taking over the world, financially if not politically. Ferguson writes: «The expansion of a Chinese digital currency will ultimately pry open the U.S. grip over global payments.»

The U.S. dollar represents more than 79% of global payments in value terms and 40% in number, with the great majority of the balance accounted for by the Euro. The Renminbi is less than 2%, if anything shrinking in terms of global relevance. Why? Because the Renminbi is not available. Try going to your bank to buy some for a trip to China. Try trading a handful for dollars at the local branch for some Renminbi. That does not work, because China does not want it to. China does not want its citizens to be able to buy real assets from abroad freely with their Renminbi, and China does not want to buy more goods than it sells, which is the way to make Renminbi available. China wants to amass dollars. The oft-referenced practice of Chinese families to have high savings rates, essentially to hoard cash, is clearly reflected in the collected, national policy inclinations.

Chinese people fled the banks very quickly when offered an alternative, because Chinese banks are genuinely horrible, offering a combination of under-market returns and long waits, inconvenient hours, and interactions with everyone from impudent tellers to bank managers who treat you like an insignificant speck of dust. The most routine transactions require lots of time at the window, because tellers operate under a bank of video cameras, and after entering information in their computers, they have to wait for approval from an invisible overseer in a remote room.

Because the banks are the most important control channel from the Party to the people outside the security apparatus, their oversight function is more important than their service function. That point should not be missed in discussing the utility and goals of the digital currency electronic payment project. It took private companies with economic motive to build a huge user base to shell out for a huge network of compatible vendors before digital payments would become available.

The Chinese government has a venerable tradition of outsourcing to the private sector the hard work of building distribution networks. The very small private-sector enablement granted at the beginning of reforms encouraged retail in goods and services, and there are dozens of other examples. Once they have figured out the business model and frontline players achieve scale and profitability, state players take back the networks. That is what is happening with the digital yuan. The key motivation has nothing to do with convenience or efficiency or reducing crime—it’s all about capturing information and, at this point, regaining control after a raucous decade of financial laissez-faire.

Big Brother Is Watching

The key to China’s digital yuan is the «big data center» at the core of the new network. That is where personal purchases will be analyzed and spliced with demographic data to develop profiles. This is where yuan exchanges into other currencies will be tallied. The profiles will be shared with security agencies in order to target people considered a security risk, and they will inform social credit scores. But they will also be monetized to the extent possible—risk profiles for lenders, purchase proclivities for marketers.

Alibaba and Tencent have never fully developed these capabilities, partly because they could mint money without doing that and partly because they do not have access to the full range of information that the PBoC will have in its «big data center.» The PBoC now proposes to develop spending profiles and use AI technologies to know everything about everybody. If history is a guide, the effort may not be all that successful, but absent any transparency or privacy constraints, it can nonetheless lead to a lot of infringements on personal rights, even inadvertently through corruption and abuse or simple technical failure. The history of the «dangan» personal portfolio, available for examination and alteration by many people but never by the subject, tells us that.

Behind the debate over the significance of the digital yuan is a gee-whiz attitude toward the mythologized technology behind crypto currencies. Older people often adopt the same indulgent bemusement toward crypto that they direct at multi-use controllers and programming the TiVo. Great that it can do so many things, but the investment in learning is not worth the return in convenience.

Actually, the technical issues behind crypto currencies are a footnote, not unlike the issues surrounding paper and ink for printing banknotes. The technology does not tell you what the currency is for. In the end, governments issue money because they own real assets, like land, resources, buildings, and militaries, and provide real services, like education, healthcare, unemployment support, retirement support, and personal and asset security. They tax in their currencies to support these things.

The Chinese yuan, encrypted in a virtual wallet or numeric, in bank accounts, is only as good as those assets and services.

Anne Stevenson-Yang

Anne Stevenson-Yang is a co-founder of J Capital Research and is J Capital's Research Director. The firm publishes highly diligenced research reports on publicly traded companies, relying on deep, on-the-ground primary research. Founded late 2010 in China, the company has particular expertise in the Chinese market but looks at overvalued companies throughout the world. Anne was formerly co-founder of a group of online media businesses in China and also founded and operated a CRM software company and a publishing company. Over 25 years in China, Anne has also worked as an industry analyst and trade advocate. She authored the 2013 published Book «China Alone: China's Emergence and Potential Return to Isolation», arguing that China historically repeats a cycle of expansion and retreat.
Anne Stevenson-Yang is a co-founder of J Capital Research and is J Capital's Research Director. The firm publishes highly diligenced research reports on publicly traded companies, relying on deep, on-the-ground primary research. Founded late 2010 in China, the company has particular expertise in the Chinese market but looks at overvalued companies throughout the world. Anne was formerly co-founder of a group of online media businesses in China and also founded and operated a CRM software company and a publishing company. Over 25 years in China, Anne has also worked as an industry analyst and trade advocate. She authored the 2013 published Book «China Alone: China's Emergence and Potential Return to Isolation», arguing that China historically repeats a cycle of expansion and retreat.