Months after his run-in with Beijing authorities, one that scrapped history’s biggest initial public offering, Jack Ma’s true whereabouts have finally been verified: at the very center of Xi Jinping’s boldest effort yet to modernize China’s economy.
Literally. For 25 years now, economists buzzed about the shift to a “cashless society.” The obvious efficiency and cost savings that come from banishing paper money had 1990s era central bankers Alan Greenspan, Hans Tietmeyer and Yasuo Matsushita on the hot seat to prepare for science fiction becoming science fact.
Then, nothing. A series of crises – in 1994, 1997, 2000, 2008, 2011, 2013 – made financial innovation a luxury few nations felt they could afford. That is, until 2021, the year China decided to make its mark as the first top economy to roll out a digital currency.
And to step into the innovative void by joining hands with China’s top tech distruster, Alibaba Holdings founder Ma.
President Xi’s government is also working with giants Tencent, JD.com and others. But the central role for Ma and his Ant Group is both the most logical move by Xi – and the most significant in terms of China’s development as a global tech leader.
Ma, famously, has been somewhat out of circulation since October 24. On that day, speaking at the Bund Finance Summit in Shanghai, Ma delivered what history might record as the priciest comments ever by a business founder.
Ma’s arguments that regulators were stymying innovation and that China’s biggest banks operated with a “pawn shop mentality” landed with a spectacular thud.
Not only was Ant’s massive US$37 billion IPO shelved, but Ma seemed to be disappeared from public life. The plot, though, thickens now that Ma is detailing the role of the fintech colossus he built in helping the People’s Bank of China create a digital yuan.
Only Xi and his inner circle know the full story of Ma’s rise, fall and rise again. But one possible reading from news the PBOC is working with Big Tech on the digital yuan is that the Communist Party isn’t out to crush entrepreneurs. It just wants them to play for the home team.
Central banks have to respond
Not just play, it seems, but hit the ground running in ways that will force hands at the Federal Reserve in Washington, the European Central Bank in Frankfurt and the Bank of Japan in Tokyo.
It is impossible for governors Jerome Powell, Christine Lagarde and Haruhiko Kuroda to continue mulling steps China is now turning into great financial leaps forward. They will have to respond.
This topic is often viewed through the lens of geopolitical intrigue. This, many argue, is China’s ploy to eclipse end US dollar hegemony – and payback for former US President Donald Trump’s trade war.
News this week that the dollar’s role in Russian exports fell below 50% for the first time in the last quarter of 2020, along with surging US debt, has markets buzzing about tectonic shifts in the currency pecking order.
“If you think that the United States has a lot of power through our Treasury sanctions authorities, you ain’t seen nothing yet,” explains Matt Pottinger, former US deputy national security adviser in the Trump administration. “That currency can be turned off like a light switch.”
On purely economic grounds, though, a digital yuan makes eminent sense. It will end the need to mint and maintain mountains of notes and coins, make it harder to hide “black money” transfer from authorities, reduce fees for companies and consumers and give the PBOC new tools to steer Asia’s biggest economy.
It also creates a broader infrastructure to bring order to the Wild West chaos of the private cryptocurrency universe.
A digital yuan, though, need not be its own speculative asset. China’s 1.4 billion people are already far ahead of their American and Japanese peers in mobile phone payments. One can easily travel to Shanghai and Beijing now without ever touching physical cash. Apps rid you of a stop at Travelex or Thomas Cook.
This isn’t necessarily a bad development. Too often the digital yuan issue is framed through the prism of Bitcoin. This is the wrong lens. What the PBOC is doing, with Ma’s help, is building an official Venmo of sorts.
The great unknowns
There are other reasons to worry about what Xi’s government is building here. By bigfooting private payment products, is Beijing essentially grabbing the fintech sector for itself – limiting private-sector competition in problematic ways.
Might Xi’s obsession with control have negative side effects for companies and consumers alike – George Orwell’s Big Brother run amok? No one knows. This is a moment for Xi’s government to tread carefully and prioritize getting a digital yuan right over the desire for a speedy rollout.
From Tokyo to Washington, the worry is that yuan hegemony is only a few digital steps away. President Joe Biden’s White House is reportedly deeply worried that a digital yuan might supplant the dollar as the undisputed reserve currency.
This concern, too, seems overdone. Even if Xi is planting the seeds for the yuan to rival the dollar, isn’t competition a good thing? Besides, the idea that Xi will allow the digital yuan to be used in large international transactions – which would require full convertibility – seems quite the reach anytime soon.
Whatever Putin is plotting in Moscow, basic inertia suggests the dollar will remain relevant even as the yuan plays a bigger and bigger role. The most likely scenario in the medium term might be the yuan eating more into the euro’s relevance than the dollar’s.
For all Washington’s fiscal excess, Europe’s lack of fiscal cooperation leaves the euro susceptible to sudden stumbles in the Covid-19 era.
There’s a stability argument, too. A more internationalized yuan means a viable alternative to the dollar should Washington’s swelling balance sheet unnerve investors. At the very least, the January 6 coup attempt at Capitol Hill suggests social unrest is a clear and present danger to the dollar. Having a truly global yuan into which to steer into, and out of, would be all to the good of global stability.
But the caveats to this story are gaping ones.
One is that Xi’s government mustn’t be distracted from strengthening China’s underlying financial system, regardless of how mainlanders interact with the yuan. The ongoing risk of default by China Huarong Asset Management Co, says Michael Pettis at Peking University, “should remind us how very unstable the financial sector can be and how nervous Beijing is about the potentially destabilizing effects of fixing the underlying problems.”
If Xi’s government sees a digital yuan merely as an extension of efforts to gain increasing control of a private sector that it should be unshackling, things may backfire. Data privacy concerns need to be carefully balanced.
Ma’s pivotal role
“China’s digital currency is as much about data as it is about money,” says Yaya Fanusie at Washington’s Center for a New American Security in Washington.
Foreign companies, even indirectly, will be cautious, worried that using the digital yuan “might end up handing over to the Chinese government lots of real-time data that it could not access efficiently through conventional banking technology.”
Here, though, news of Ma’s pivotal role in the process allows Xi’s reformers to maintain a veneer of progress and financial “wokeness” — and a way for Xi to keep potential yuan rivals close. Xi may be heading off moves by Alibaba, Baidu or other tech giants from trying to float their own cryptocurrencies, as Facebook is angling to do in the US.
The fact Ma, Tencent, JD.com and others are suddenly opening up about their role in digital yuan preparations is no accident. Given Ma’s post-October 24 experience, there’s zero chance Ma or management at Ant and Alibaba would speak out of class. And it’s wise to let the faces of Chinese tech do the talking.
Against the backdrop of the regulatory action in Beijing, says Wang Peng at the Renmin University of China, “it’s the best choice for Chinese internet conglomerates to cooperate with the central bank on the R&D, pilot trials and operational work of digital yuan.”
For one thing, Ma and his ilk are the real experts. Refining the ubiquitous Alipay service has given Ma an education that PBOC Governor Yi Gang’s team has been tapping into since. Anyone who wonders how well politicians and central bankers understand tech should watch a video of the CEOs of Google, Facebook and Twitter testifying before Congress. Just painful.
And for Ma, of course, what better way to re-enter the mainstream than as a key architect of one of Xi’s biggest reforms? Though Ant was ordered by the PBOC to restructure its operations, helping to develop the future of mainland finance seems an ideal way to get Ant’s IPO back on track, even if the company that goes public is a shadow of the original.
Banks left behind?
Yet there’s still a question of how far Xi will go. The transactional efficiency from a digital yuan sounds grand. Until you consider what all this means for the legacy banking behemoths that have long had legislators’ backs.
It’s a huge feather in Beijing’s cap to see the Industrial and Commercial Bank of China, China Construction Bank and Agricultural Bank of China dwarf Deutsche Bank, JPMorgan Chase and Mitsubishi UFJ Financial Group on the international league tables. Late last year, party bigwigs were tickled to see Ant’s pre-IPO market capitalization topping Goldman Sachs.
This empire is apt to strike back. That goes, too, for the factions Xi needs to gain a third term as party leader.
This is not just a Chinese problem. Look no further than JPMorgan CEO Jamie Dimon warning shareholders this month of the “enormous competitive threats” that fintech poses to conventional banks.
Fintech startups “are making great strides in building both digital and physical banking products and services,” Dimon says. “From loans to payment systems to investing, they have done a great job in developing easy-to-use, intuitive, fast and smart products.”
Thanks to PayPal, Robinhood, Stripe, Venmo and the like, Dimon says, “banks are playing an increasingly smaller role in the financial system.” The same goes for Silicon Valley’s top names – from Amazon, Apple, Facebook, Google and even Walmart. As McKinsey & Company’s Alexis Krivkovich points out, fintech outfits are “catching up with traditional banks in terms of customer trust.”
Yet Dimon could easily be talking about the Xi-Ant-Tencent continuum when he observes that “fintech’s ability to merge social media, use data smartly and integrate with other platforms rapidly (often without the disadvantages of being an actual bank) will help these companies win significant market share.”
In Ma’s case, the Ant-backed online bank MYbank is one of the key operational institutions that will offer the digital yuan. It turns out that since June 2019, the PBOC’s Digital Currency Research Institute has been using Ant’s mobile app development platform known as “mPaaS” to hone its own skills.
Tencent also has been pivotal to the PBOC’s e-CNY project. Huawei Technologies has been offering technical standards, while its Mate 40 smartphone late last year became the first to offer a wallet for a digital yuan. Earlier this year, e-commerce giant JD.com began disbursing salaries to some employees in digital form.
In other words, this is an all-hands-on-deck moment for China Inc, with Ma at the very center.