Today, China is ahead of the United States in almost every aspect of digital finance – including the creation of the central bank’s digital currency – and it wants its super apps to grow in the future. global scale. In “The cashless revolution: China’s reinvention of money and the end of American dominance of finance and technology,” Chorzempa, now a senior fellow at the Peterson Institute for International Economics, explains how Chinese fintech entrepreneurs grew so rapidly and rapidly — and what happened when they became a threat to the Chinese state . Despite the hyperbolic subtitle, the book is an authoritative, comprehensive, and thoughtful account of a remarkable episode in technology and finance that offers lessons for the United States as it seeks to foster innovation in finance without jeopardizing consumer stability or financial stability. It is written clearly enough for readers who are not experts in Chinese finance or politics. (Full disclosure: While reading the acknowledgments, I discovered that Chorzempa and I share an agent and a publisher. I have not discussed this book with either of them.)
The first and last chapters of this book capture the essence of the story and may be enough for readers less interested in the blow-by-blow (and sometimes repetitive) narrative of the rise and fall of Alibaba’s Jack Ma. and Tencent’s Pony Ma (who share a common surname in China and are unrelated). In short, the large public banks were not run for the benefit of savers or small borrowers, but for the benefit of public enterprises, which benefited from low-interest loans. Banks had virtually no competitors until Alibaba (which launched Alipay) and Tencent (which owns WeChat), encouraged by the leadership of the Communist Party, built, as Chorzempa explains, “a new model finance around the super-apps that started with e-commerce”. , social media and games and have grown into financial empires spanning payments, investments and loans. It was as powerful an economic force as a merger of Facebook and Vanguard would be. The apps are so entrenched in the daily lives of Chinese people that in 2020, a Guangdong court ruled that instead of jail, labor camps or fines, convicts would stay free but face a five-year ban from prison. to use digital payments. This was considered a severe enough punishment.
Chorzempa highlights several elements of the success of Alibaba (and its spin-off, Ant Group) and Tencent that are not popular in the United States. One is the important role of foreign investors (including Yahoo and US venture capitalists). At first, foreign expertise also played a role, helping, for example, to introduce the QR codes originally developed by Japanese automakers for supply chain tracking, which are now so ubiquitous in China that beggars use them. A second factor is the opening created for upstarts when China banned Visa and Mastercard to protect UnionPay, China’s credit card monopoly. This meant that, unlike Americans, the Chinese did not appreciate the usefulness of credit cards and were therefore more open to another alternative to cash. Third, the Chinese economy has not been propelled exclusively by state subsidies and five-year plans, but by law-abiding entrepreneurs. “China,” writes Chorzempa, “is extremely messy, with widespread violations of the law and a government with massive blind spots to what is happening in its economy and financial system, with tacit authorization often given to activities manifestly unlawful”.
Finally, there is the crucial role of Zhou Xiaochuan, a pro-market reformer who led the People’s Bank of China, China’s analogue of the Federal Reserve, from 2002 to 2018. Zhou, as Chorzempa puts it, “invited big tech in finance to compete with public banks and force them to transform, realizing that simply ordering banks to become more innovative was doomed to fail.He ensured that financial institutions in place could not use their political influence to block fintech disruptions in their monopolies.
It’s not a happily ever after story. Peer-to-peer lending, largely unregulated, has turned into a bubble that has cost Chinese savers billions. Then the Communist Party and financial regulators — including Zhou — decided that their efforts to break up the banking monopoly had produced an even bigger one in super-apps. In 2020, the government forced Jack Ma to cancel the IPO of his Ant Group. He resigned from his post and largely disappeared from public view. The regulation of fintech giants has been significantly tightened. And when the coronavirus pandemic hit, the government used the super apps to monitor the health and control the movements of Chinese citizens, illustrating the amount of personal information companies had made available to the government. (Chorzempa writes, however, that Chinese consumers have more control over how their data is used for credit scoring than Americans).
What does all this mean for the United States? China illustrates how promoting competition can generate innovation and reduce costs for consumers and traders. But it also shows the dangers of a siled regulatory system that is not equipped to ensure that fintech does not rip off consumers, offload risk onto taxpayers, compromise citizens’ privacy, or hide no blatant conflicts of interest. China, says Chorzempa, is a laboratory for the rapidly changing world of fintech and how governments are dealing with it — and it has ambitions to dominate the global fintech market. We must learn from China as it has learned from us.
David Wessel is director of the Hutchins Center on Fiscal and Monetary Policy at the Brookings Institution. His most recent book is “Only the Rich Can Play: How Washington Works in the New Gilded Age,” the story of the Opportunity Zones.
China’s reinvention of money and the end of American dominance of finance and technology
Public affairs. 320 pages. $29
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