Fintech and ‘China’s Reinvention of Money’

Recent Features

Interviews | Economy | East Asia

Fintech and ‘China’s Reinvention of Money’

Insights from Martin Chorzempa.

Fintech and ‘China’s Reinvention of Money’
Credit: Depositphotos

The Diplomat author Mercy Kuo regularly engages subject-matter experts, policy practitioners, and strategic thinkers across the globe for their diverse insights into U.S. 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 adopter of technology. It began with online payments, which tech firms had to invent themselves because China lacked the convenient system based on credit cards we take for granted. But payments then became the foundation to build super apps that fused together just about anything you can do with a bank, like investing and getting a loan, with a whole ecosystem of online and offline services. Think your mobile banking app plus Venmo, Messenger, Uber, Twitter, and Kindle all in one.

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

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 to state priorities. Often the return on deposits was below inflation! It was very monopolistic with low pressure to innovate. Fintech disrupted this system, bringing competition that led banks to shape up and offer better service to compete.

Explain the correlation between China’s social credit system and crackdown on financial risk.

Both stem from a major shift in under Xi Jinping, including both increased risk aversion and a desire to increase government oversight over 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 comes from legitimate concerns that rampant lawbreaking in finance created major risks of financial crisis that needed to be curbed. Both can be taken too far, as we have seen with social credit as its punishments proliferated and became more draconian, like bans on planes and trains applied to 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 fintech 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 they have largely failed to gain users overseas.

In part this is due to classic business difficulties – adapting to a foreign market different than China, where U.S. companies like WhatsApp managed to beat out WeChat in the social media marketplace. To a great extent, however, they have run aground on national security concerns, especially around the access to sensitive data on foreign citizens that operating a super app would afford them.

Assess how China’s cashless revolution is bringing an end to the United States’ domination of finance and technology.

The flow of ideas in fintech has reversed, with onetime copycats in China now leading in key areas of innovation, inspiring Silicon Valley titans like Mark Zuckerberg and Elon Musk. The U.S. still has enormous 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 USD-based system.