Fintech and ‘China’s Reinvention of Money’

The Diplomat author Mercy Kuo regularly engages subject matter experts, policy practitioners, and strategic thinkers from around the world to elicit their diverse views on US policy in Asia. This conversation with Martin Chorzempa ̶ senior fellow at the Peterson Institute for International Economics and author of “The Cashless Revolution: Reinventing China’s Money and Ending America’s Domination of Finance and Technology” (Public Affairs 2022) – is 348 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 technology adopter. It started with online payments, which tech firms had to invent because China lacked the convenient credit card-based system we take for granted. But then payments became the foundation for super-apps that merged almost 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 rolled into one.

What are the elements and impacts of China’s financial crackdown?

Financial repression meant a state-dominated financial system with limited competition and choice, all designed to funnel people’s savings into banks at low interest rates so cheap loans could flow toward state priorities. Deposit returns were often below inflation! It was very monopolistic with little pressure to innovate. Fintech disrupted this system, bringing competition that led banks to get in shape and offer a better service to compete.

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Explain the correlation between China’s social credit system and the suppression of financial risk.

Both stem from a major change under 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, such as a surprising inability to enforce court decisions. Similarly, risk suppression stems from legitimate concerns that rampant lawbreaking in finance created significant financial crisis risks that needed to be controlled. Both can be taken too far, as we’ve seen with social credit as its punishments proliferated and became more draconian, such as plane and train bans on journalists who got in trouble for their reporting.

Examine the overseas reach of China’s fintech.

It has actually been surprising how limited the reach of Chinese fintechs abroad has been despite their immense domestic success, abundant capital, data, and advanced technology. Chinese tourists and students in dozens of countries can pay with Alipay and WeChat Pay, but have largely failed to win oversea users.

In part, this is due to classic business difficulties: adapting to a different foreign market than China, where American companies like WhatsApp have managed to beat WeChat in the social media market. To a large extent, however, they have run aground on national security concerns, especially around access to sensitive data about foreign citizens that would allow them to run a super app.

Evaluate how China’s cashless revolution is ending the dominance of US finance and technology.

The flow of ideas in fintech has reversed, with former imitators in China now leading key areas of innovation, inspiring Silicon Valley titans like 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 like sanctions lead many countries to explore alternatives to the current US dollar-based system.

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