Written by The Chinese government had a bit of a crackdown on QQ coins with the predictable (to economists) result: the price of the money went up (in fact it went up by 70% against the Yuan) which clearly indicates that there is a significant unfulfilled consumer demand for the new currency.
[From Digital Money: What kinds of competitors?]
Tencent runs social network and instant messaging services, but its business models makes use of virtual goods rather than being advertising-based.
Unlike its U.S. counterparts Tencent makes money by relying on users to spend money within its networks, not on brands to advertise on it. For example, online advertising is a small part of Tencent’s overall revenue, or only 10 percent, while e-commerce represents about 70 percent of the company’s overall revenue (mobile makes up the rest). In all, it sells about $750 million in virtual goods a year.
[From How One Social Net In China Is Making A Lot Of Money | paidContent.org]
Interesting, to say the least! It’s not just Tencent’s QQ Coins that are causing concern to the authorities. Last year, a senior official with the People’s Bank of China said that the rapid development of e-money and online payment systems “affects the central bank’s monetary policies”. Is this right? What are the figures?
The amount of cash in circulation reached 3.4 trillion yuan ($500 billion) last year, and the gross payment, the total amount of money exchanged in transactions nationwide, was 1.13 quadrillion yuan ($166 trillion) as of last December, according to Ouyang Weimin, director-general of the Payment System Department of the PBC… “The gross payment has risen rapidly, but the cash in circulation has kept steady at around 3 trillion yuan ($441 billion) these past few years. This indicates a rapid increase in the use of electronic money and online payment.”… Of the more than 10 trillion yuan ($1.5 trillion) in gross retail sales last year, electronic payment through bank cards reached 3 trillion yuan ($441 billion).
“More than 1 trillion yuan ($147 billion) cash went into circulation in 2005. From this we can see the increasing liquidity, which may cause inflation, partly due to the frequent use of electronic payment,” said PBC’s Ouyang.
[From Global Times – E-money poses problems for central bank]
This is an understandable concern, but if the cash is not being used for transactions then it is less of a worry. The figures show that in China, just as in Europe and in America, the amount of cash in circulation continues to increase significantly, but the fraction of retail payments in cash is falling. So what is the cash being used for? Who can say: some of it is probably being hoarded, but there must be a suspicion that some of it is being used to fuel less-regulated parts of economy. Presumably the authorities will at some time become concerned, but will they want to start a Chinese war on cash? I think they may, and given the administrative arrangements in China compared to Europe, say, then one might predict a greater likelihood of success. Back in the day, Genghis Khan created a paper money system through the simple expedient of capital punishment, instituting the death penalty for anyone who tried to use gold or silver instead of his accept paper money.
As Marco Polo noted in his “Travels”… “Furthermore all merchants arriving from India or other countries, and bringing with them gold or silver or gems and pearls, are prohibited from selling to any one but the emperor. He has twelve experts chosen for this business, men of shrewdness and experience in such affairs; these appraise the articles, and the emperor then pays a liberal price for them in those pieces of paper. The merchants accept his price readily, for in the first place they would not get so good an one from anybody else, and secondly they are paid without any delay. And with this paper money they can buy what they like anywhere over the empire”
The Chinese fiat currency system eventually collapsed in hyperinflation (as I suppose they all do in the end) in the 14th century, but I digress. So far as a potential war on cash goes, the Chinese central bank says that
Compared with cash, electronic money has advantages such as lower cost and higher efficiency… “The cost of electronic money is just 35 percent of that of a cash payment”… However, it brings problems such as payment safety and supervision difficulties, Guo Tianyong, director of the Research Center of the Chinese Banking Industry at the Central University of Finance and Economics, told the Global Times.
In April, the PBC launched its first investigation into the payment business of non-financial companies, including online payment services like Alipay.com, China’s PayPal, virtual money providers like qq.com, and shopping malls and supermarkets issuing shopping cards.
[From Global Times – E-money poses problems for central bank]
Incidentally, Alipay (which is China’s leading e-payment system with more than 200m users)has just announced another five billion Yuan investment in its infrastructure, which must reflect confidence in the continuing growth of the online payments sector there. There’s still a long way to go though.
In many parts of the world it is a difficult to buy things online with traditional currency and traditional payment vehicles such as credit cards. The phenomenal growth of virtual worlds, virtual items and virtual currency in China is directly related to the lack of good ways to buy and trade things online in a traditional manner.
[From Kevin’s Corner: Virtual Currency Meets Main Street]
The market needs payments, but it works the other way round as well. New payment systems (that work) create new markets on top of them. The Chinese have so far focussed on introducing “Western” payments to their domestic market (although under a local monopoly) but I wonder if it might develop further by creating new payment systems more suited to the local market? There are a staggering 1.5 billion payment cards in the Chinese market already but
Of the huge sum, active cards, which were used at least once every month, were only about 80 million, less than 10 percent of the total… The large number of dormant cards is partly due to payment habits of some domestic consumers, who prefer cash transactions instead of the “virtual numbers” on the cards, analysts said. Besides, to lift market shares, domestic banks issued a massive number of cards to take in as many clients as possible. Many cards were scarcely used after issuance.
[From Bank cards pose challenge yet opportunity]
This all looks puzzling from a pure market perspective: QQ Coins are successful, so crack down on them and issue everyone with cards that they don’t use instead.
There are plenty of other interesting things going on in the Chinese payments marketplace. One example of current interest, given my obsession with the links between identity and money, is the use of Octopus technology to implement citizen’s cards with payment options in many Chinese cities.
Digital China and Octopus Form Partnership to Jointly Develop Citizen Card Application Solutions and Operational Service in Mainland China
[From Octopus Holdings Limited – Press Releases]
If we had gone down this same route then many of us might already have citizen cards with Oyster built in and we’d be using them for everything from riding the bus to borrowing books in the public library. But what’s especially fascinating about Octopus is that it is becoming a regional payment scheme far beyond its original conception.
The Hong Kong Monetary Authority is hatching a scheme to create a common cross-border e-money card and EFT-POS framework for transit and small value payments in the Pearl River Delta region, which comprises Hong Kong, Macau and nine municipalities of the Guangdong Province in the mainland of China.
[From Finextra: Hong Kong and China plot cross-border e-money scheme ]
In fact Octopus is already used cross border and has been for some time.
It turns out Hong Kong’s so-called Octopus smart card, kicked off in 1997, has become a huge hit. More than 1,000 vendors accept it as a form of payment, including grocery stores, clothing stores and fast food outlets in the special economic zone of Hong Kong and Shenzhen, the giant factory town across the frontier border in mainland China. The system logs an average 10 million transactions a day valued at more than US$10.8 million on more than 50,000 readers.
[From EETimes.com – Reporter’s notebook: Octopus consumes Hong Kong]
Many cities in China will soon be issuing citizen cards with contactless capabilities and I think they will provide an excellent case study into the extent to which identity, rather than payments, will drive the next phase of evolution. Could it be that Octopus becomes the foundation on which Chinese cashlessness will be built, the 21st-century equivalent of Genghis Khan’s mulberry bark?
These opinions are my own (I think) and presented solely in my capacity as an interested member of the general public [posted with ecto]
