Digital Finance and Platform Economy Guide Future Development
China's total e-commerce transaction volume went up 19.6 percent year-on-year in 2021. The transaction volume hit 42.3 trillion yuan ($6.15 trillion) last year, according to a report released by the Ministry of Commerce at the 2022 China E-commerce Convention.
Of the total, the e-commerce transaction volume of goods reached 31.3 trillion yuan, while that of services came in at 11 trillion yuan last year, the report said.
Meanwhile, China will list 14 e-commerce industrial parks as e-commerce demonstration bases, bringing the total number to 155.
China's e-commerce sector ranks first in the world in terms of online retail market, online shoppers, digital express delivery business and mobile payment scale, said Vice Minister of Commerce Sheng Qiuping, adding that the sector has shown strong resilience since 2021 despite uncertainties.
The 2022 China E-commerce Convention is part of the ongoing 2022 China International Fair for Trade in Services.
Unless you've been under a rock for the last couple of years, you'll have heard about the metaverse, cryptocurrency, non-fungible tokens (NFT) and the democratization of art. NFTs in particular have taken up a lot of space, with critics calling them a 21st-century scam, and enthusiasts seeing them as a fun, accessible, authentic way to consume art. This month, seven programs at the new M+ Cinema and the classic film exhibition Cryptyques are asking audiences to reconsider how NFTs are connected to cinema.
Whatever your feelings, it seems NFTs are here to stay, and so Hong Kong startup Beam+ Lab on June 8 launched the interactive NFT exhibition Cryptyques. Under the direction of Hong Kong photographer Wing Shya, the collection is based on classic moments from Hong Kong films, and designed to reenergize traditional film intellectual property as well as stimulate reflections on the human experience. On top of that, Cryptyques aims to defy "the norms of the entertainment industry, and set the tone of entertainment in the Web3 era - bringing forward a fairer and more collaborative model for creators".
With 3D technology, Cryptyques is re-creating 1,320 classic moments from 600 notable Hong Kong films, including Patrick Tam Kar-ming's crime romance My Heart Is That Eternal Rose (1989) as well as 1982's Nomad (starring the late Leslie Cheung Kwok-wing), about a group of disaffected friends trying to find their place in the world. The pre-minting exhibition (if you buy an NFT, you'll be "minting") is designed to "bridge the gap between the physical world and Web3 by offering a hybrid experience that unlocks the metaverse". There will also be workshops, screenings and talks to help many of us better understand the emerging art landscape.
While Beam+ Lab pushes the boundaries of the future of media art and engagement, M+ Cinema (which also opened June 8) looks back to survey the landscape of cinema as a medium of expression, and puts it into context for past, present and future. But in many ways, Beam+ Lab and M+ are exploring similar themes and concepts of how we connect with art and media.
With three intimate auditoriums (the biggest holds 180 people), M+ Cinema's programs trade in shorts, features and documentaries about art and artists, as well as experimental films and video art. The idea is to engage with audiences through artist talks, and cultivate an understanding of film as a discipline in a visual landscape that complements, rather than competes with, traditional art - M+'s core disciplines being visual arts, design and architecture. Watching a film and then waltzing into the main gallery to see a partnered artwork brings new meaning to both, and it's among the reasons M+ has cinema in its DNA.
A perfect example of this is the inaugural screening series Hong Kong: The Establishing Shot, a program in direct dialogue with the museum's current centerpiece exhibition, Hong Kong: Here and Beyond. Together they survey the city's evolving "capacity as an activated stage where time, space and action intersect in compelling narratives".
The series' nine films span the 1980s to the present - including Cheang Pou-soi's breakout Accident and Ann Hui On-wah's The Way We Are - and illustrate how the city has shaped identity and visual culture over the years. It's a visual culture not limited to movies but extending to commercials and music videos, a selection of which will screen before the main features. The series also reassesses the defining action genre and how it has imprinted Hong Kong onto the global consciousness.
China intensifies crackdown on cryptocurrency hype, speculation
China's internet watchdog said on August 9 that it had intensified a crackdown on illegal online information that may lead to speculation and fraud involving cryptocurrency.
The move since earlier this year was aimed at protecting people's property, according to the Cyberspace Administration of China.
While urging leading online platforms to fulfill their responsibilities in presenting content, the administration shut down 989 accounts on Weibo, WeChat and Baidu's online community service, which misled internet users to invest in cryptocurrency, as well as virtual or digital assets.
The administration, in joint efforts with other competent authorities, also closed 105 websites hyping cryptocurrency or releasing information concerning cross-border speculation on and mining of cryptocurrency.
While pledging continuous efforts to curb illegal activities involving digital currency, the administration also cautioned internet users against cryptocurrency speculation.
The platform economy drives economic growth
The platform economy, as an economic activity that leverages digital technologies, has had a positive impact on the financial sector as well as economic growth. Platforms and digital technologies have solved many of the challenges facing the financial system, especially in inclusive finance.
China has seen momentum in developing mobile payments, online investment, big tech credit and digital currency, which all play a significant role in driving inclusive finance. These areas are expected to play a critical role in the country's future economic growth.
To begin with, the platform economy has a great impact on the financial sector, which can be narrowed down to "three increases and three decreases".
The "Three increases" means that the platform economy has helped "increase business scale, improve efficiency as well as user experience". As the platform can offer services to many customers at the same time, costs are minimized so overall efficiency will naturally be enhanced.
Digital platforms also offer personalized services. With technological advances, these services will be much smoother, more convenient to use and more popular among consumers.
Just imagine, if mobile payments fail, users are less willing to use them. If 2G communication technology was still in use today, online payments and other web-based activities would be very inconvenient. Technological advances have therefore continuously improved the overall user experience.
The "Three decreases" refers to "reducing costs, lowering risks and minimizing contact". In terms of risk control in particular, user data accumulated by the platform will be very helpful to identify risks in advance.
Based on the above changes, digital platforms will also have a certain impact on the rules and even laws of economic activity and exchanges. It will make users more reliant on the platform itself, but the platform will also be closely related to the economy.
China first embraced the internet in 1994, which gave birth to the first internet company-Yinghaiwei. Since then, a group of internet giants like NetEase, Baidu, Alibaba, Tencent and Sina have emerged.
At present, the country's platform companies have developed quite well and are comparable to leading foreign internet heavyweights, thanks mainly to improvements in digital technology, market-oriented reforms, the large population and relatively independent market conditions.
However, the development of the country's digital economy also needs regulations, especially when it comes to personal data protection. Some platforms collect and analyze data illegally, which violates privacy and harms consumer interests.
This is also why in the past year regulators have taken a series of measures to oversee platforms. Such efforts aim to drive the platform industry to develop in a more standardized manner. From this perspective, the country's platform economy has broad development prospects.
To elaborate further, finance is an indispensable part of economic development. The biggest problem in the current financial development is information asymmetry, which can easily lead to serious systemic risks. An important function of the financial system is to reduce the degree of information asymmetry and improve the reliability of transactions, or what we call "inclusive finance".
Inclusive finance is increasingly playing a more critical role in China's economic development. On the one hand, the nation's economic growth has been very successful in the past years with an average annual GDP growth of over 9 percent. But there are many gaps between regions, problems with income distribution and operating environments for small and medium-sized enterprises.
The importance of inclusive finance will be even more prominent as common prosperity has been highlighted as a major goal of economic development. It means that economic development going forward will pay more attention to the livelihoods and businesses that inclusive finance serves.
On the other hand, in the new stage of development, China's economy will move to high-quality development, and innovation will play a crucial role in driving economic growth. To drive such innovations, small, medium-sized and micro enterprises are the main force.
In the past, inclusive finance was mainly intended to promote social equity. But today, a more important function is to promote sustainable economic growth.
China made a big leap in inclusive finance from 2016 to 2020 mainly due to the application of digital technology.
Digital finance started in 2004 with the launch of Alipay and the latter developed its own payment system similar to eBay in the United States. In 2010, digital payments were finally launched. Later, WeChat payments arrived along with a series of digital finance modalities.
I prefer to use the concept of digital finance to refer to the application of digital technology in finance. Digital finance is different from internet finance and financial technology. Its connotation tends to balance the two, including both tech companies using digital technology to provide financial services, and traditional financial institutions using digital technology to improve their financial services.
In recent years, the development of digital finance has been very active at home and abroad. But foreign countries pay more attention to blockchain technology, distributed accounts and the metaverse and more specifically cryptocurrency, digital currency, cross-border payments and other fields. China's digital finance is more related to mobile payments, online investment, big tech credit and digital renminbi.
The development of inclusive finance in China is relatively insufficient, and a considerable number of financial services are inadequate, especially for small and medium-sized enterprises, low-income households and rural economic entities.
The above groups have little access to financial services. Therefore, digital finance products have been warmly welcomed.
Another important reason for the rapid development of mobile payments is the application of digital technology. This enables mobile payments to have high service quality and allows the platform to scale profits. Daily active customers of WeChat Pay and Alipay have exceeded 1 billion, which is an unprecedented breakthrough, and few digital payment tools can achieve that.
In addition, digital finance has made outstanding progress in the field of big tech credit. In the past, it was very difficult for SMEs to obtain loans, and it was hard to acquire customers and control risk as well.
Big tech credit and loans help solve the two bottlenecks by making it possible to acquire a large number of customers. In addition to WeChat and Alipay, Douyin, Meituan, JD and other large platforms also have a very large number of users.
Today, anywhere in China, as long as one has a smartphone and a signal, financial services are accessible. Big tech credit is also able to analyze customers, evaluate their creditworthiness and then find ways to convert them into customers, which solves the problem of customer acquisition.
Whether for surfing, searching, socializing, watching short videos, ordering takeaways or using e-commerce shopping, user trends will leave digital footprints.
The accumulation of such a digital footprint becomes big data, which is very helpful to monitor borrowers' conditions in real-time.
Under the traditional model, banks use financial data of an enterprise as the basis for evaluation, but the financial data are basically based on quarterly units. On the contrary, the digital footprint is real-time data, which can illustrate the behaviors or transactions of users in real-time.
With the support of platforms and digital technology, there will be more new development areas in the future, such as wealth management supported by digital technology, intelligent investment advisory platforms, as well as industrial chains, the internet of things and supply chain finance. In conclusion, digital finance has gained some momentum with the help of digital and platform technologies, but there is still a long way to go in the future.
Online fraud under strict supervision
With China strengthening efforts to combat telecom and online fraud in recent years, Chongqing police cracked down on a large transnational criminal group involved in around 470 cases involving funds amounting to some 350 million yuan ($54.91 million) last month.
Under the guidance of the Chongqing Public Security Bureau Criminal Investigation Corps, officers from the Banan district public security sub-bureau have visited 12 provinces and cities around the country in pursuit of the group, arresting 168 suspects and freezing 63 million yuan in assets related to fraudulent activities since June.
"This case involved a large sum of money, many suspects and activities in several foreign countries, including the Philippines, the United Arab Emirates, Cambodia and Myanmar," said Tu Ruquan, director of the Banan anti-fraud center, who led the operation. "It is still under investigation, and we are trying to recover as much of the money lost by victims as possible."
In the past few years, many Chinese people have fallen victim to a variety of online fraud. A China Internet Network Information Center report showed that by the end of June, 17.2 percent of netizens had been defrauded.
Data from the Supreme People's Court, the country's top court, revealed that the sums involved amounted to 35.4 billion yuan last year alone.
In mid-June, Banan police received a crime lead from the Ministry of Public Security. A preliminary investigation found that the crimes were the work of a telecom fraud gang based in Southeast Asia, which had rented offices and equipment in the Philippines, Cambodia and elsewhere, through fake online investment platforms.
The police introduced a case about a housewife referred to as "Mrs Lin", who had made some small investments in the stock market. One day in April last year, Lin received a call from a stranger who claimed to be a stock expert, asking her to join an online WeChat group for free lessons. She agreed.
The group had about 150 members and gave two live lectures a day on investment tips, stock recommendations and even the exact time to sell and buy shares. In a matter of days, Lin made about 7,000 yuan, and other members also said they had made money. She began to trust one of the so-called stock experts.
In late April, the expert gathered together more than 8,000 people from various WeChat groups to invest in cryptocurrency, including Lin and her two sisters. They downloaded an app as instructed by the so-called expert and for the first 10 days, the trio made money and were also able to withdraw their earnings. They then invested a sum of around 1 million yuan.
On May 8, they found they were no longer able to log onto the app. Then, they discovered they had been removed from the WeChat group and that all its so-called stock experts had also disappeared. "Only one or two people in the WeChat group were real investors, the rest were actually the swindlers," Tu said.
As the victims had each been scammed out of a large sum of money, Chongqing police decided to set up a task force under the supervision by the Ministry of Public Security.
To escape from Chinese police, most fraudsters relocate to other parts of Asia, the Middle East, Europe and even Africa, Tu said.
"Their overseas operations make things extremely difficult for us, especially during the pandemic," he said, adding that despite this, they had managed to arrest 168 people suspected of committing fraud overseas on their return to China.
A nationwide campaign against online scamming has effectively curbed rising telecom fraud, according to the Ministry of Public Security.
"The most important thing is to raise public awareness of fraud, and that there is no such thing as a free lunch," Tu said.
Will banks adopt e-finance fast?
Fintech and e-currency momentum builds to decentralize transactions and value storage. Central banks cannot wait on the sidelines. They should match or better the value propositions of e-coins and fintech platforms. Cross-system interoperability can be achieved if a consortium of technology and financial regulators sets common standards. Oswald Chan reports from Hong Kong.
China, the European Union, and the United States, are all exploring the complex e-currency ecosystems to frame regulations, controls, transaction efficiencies, security, visibility, and national policy mandates. The centralized financial system will eventually be disrupted by cryptocurrencies and decentralization, even though these account for only a small amount of global flows now.
Once digital currencies can exchange directly in a bilateral way without being parsed through a third-party settlement system like SWIFT, transaction costs will be drastically reduced and the need for a dominant global reserve currency also reduced. The technology architecture for that can be built with standardization and agreed protocols. But the policy issues around sovereign currencies remain far more problematic to align.
The US is the world financial system leader by default. Eighty-eight percent of global currency trades are contracted in US dollars. Sixty-two percent of global currency reserves are held in dollars. Seventy-nine percent of international trade invoices list dollars. About 65 countries peg their respective currencies to the US dollar.
That dominance of the global financial system gives the US extraordinary privilege to print money freely, and excessive power to impose financial sanctions unilaterally on other countries. That was exercised most recently, in relation to the Ukraine war, on Russian banks and assets held in the US and elsewhere.
The ease and speed with which the US can disenfranchise foreign holdings of US dollars in the US banking system has caused widespread alarm among many nations, which are all studying ways to reduce their exposure, or exit from such financial vulnerability.
The US faces a challenge of digital currencies, fintech platforms, and decentralized cross-border settlements without US dollars. As the world’s premier exporter and trader, China is enabling settlements in yuan when feasible, rather than in US dollars. The yuan now accounts for about 2 percent of global payments although China controls 14 percent of global exports, and more countries trade with China than with the US.
The US is in the bull’s-eye of Clayton Christensen’s 25-year-old “disruptive-innovation” theory, developed at the Harvard Business School. Christensen and his team postulate that a mature industry drives leaders to focus on the most profitable users. That allows new entrants to target the under-served, less-profitable segments. These new entrants would typically be ignored by the market leaders.
Over time, these newcomers innovate and upgrade, to challenge and displace the conservative market leader. The US banking system can opt to protect the status quo to delay e-currencies, fintech, and mobile payment platforms, or become a player too. Meanwhile, major trading centers like China, the EU, Russia, and India are mulling ways to reduce the risks of being overly tied to the US banking system.
The transition will be gradual. There is no global consensus yet on rules, regulations, fintech platforms, mechanism for e-currency exchanges, standardization, systems compatibility, interoperability, etc. Experiments are being conducted within contained scenarios. Any future international e-monetary system will have to align the financial hubs of London, New York, Hong Kong, Tokyo, Singapore, and Switzerland.
Governments favor central bank digital currencies (CBDCs) to retain control over their financial ecosystem. The fear of falling behind the e-currency developments is driving governments to consider their own e-coins. Will they coexist with private, distributed-ledger, blockchain-secured e-coins? Will governments co-opt, compete, restrict, or declare private e-currency illegal?
CBDCs may be able to lower the transaction fees that global corporations pay — estimated at $120 billion per year — by a Brookings Institute paper published in March by Michael Sung and Christopher Thomas. That is an inefficiency of the dollar-denominated system. CBDCs may speed up money flows and fine-tune capital controls. These are wish lists for the digital currency economy. As adoption of e-currencies by CBDCs grow, the dominant power of the US dollar will diminish.
The advanced economies of the US and Europe are lagging behind in the race to experiment, innovate, and test CBDC. The proactive CBDC trials seem to revolve around China’s advanced cashless-payments expertise, and eight years of CBDC researching, with its Hong Kong special administrative region reaching out to Thailand and the United Arab Emirates to rally critical mass for wholesale settlements.
The PwC Global CBDC Index, published in 2021, says that more than 60 central banks have been studying CBDCs since 2014, together with global institutions like the Bank for International Settlements, the World Bank, the International Monetary Fund, and the World Economic Forum. The Western global institutions are watching to contain disruption; they are not leading.
In October 2020, central banks of the Bahamas and Cambodia issued digital currencies — the Sand Dollar and the Bakong, as retail use cases of the CBDC — to drive financial inclusion, reduce transaction costs, upgrade payment efficiency, and promote financial services. Both are places with negligible effects beyond their geographies.
After eight years of researching, the People’s Bank of China plans to launch the digital yuan, the e-CNY, in the near future. The national e-CNY tests for e-commerce, ATMs, point-of-sale terminals, etc, use smart cards to include those without smartphones. Under these trials, over 261 million personal digital wallets have been opened and $13.8 billion in transactions enabled by the end of 2021. These results boost confidence to scale the digital yuan domestically.
The PBOC issued digital currency to commercial banks for distribution to the public. That enabled the tracking of e-CNY flows through banks and between users, giving the PBOC greater visibility on the circulation dynamics of the e-CNY. The pilot program spans the Yangtze River Delta, the Pearl River Delta, the Beijing-Tianjin-Hebei region, and central, western, northeastern, and northwestern regions.
The Chinese mainland has about 850 million online shoppers, many of whose purchases are powered by the online payment proprietary architecture of Alipay and WeChat Pay. The e-CNY will establish a national standard. Whether Alipay and WeChat Pay will continue to serve consumers with their proprietary architecture or integrate into the e-CNY platform is not yet known.
Despite the e-CNY’s potential for adoption of the yuan as a global reserve currency, other factors enter the matrix-like currency convertibility, capital controls, and depth of the capital market. These are much larger international considerations beyond technology and payment systems.
However, the dynamic domestic experience provides ample opportunity for private companies to innovate new services and to further simplify and streamline the e-commerce and retail payments experience for users. These developments may enable replication in other currency markets not policy-constrained and outside the yuan ecosystem.
The e-HKD initiative
The Hong Kong Monetary Authority, the city’s banking regulator, followed up its wholesale CBDC trials of Project LionRock in 2017 with Multiple CBDC Bridge (mBridge) in 2021 with the collaboration of the Bank of Thailand, the Central Bank of the United Arab Emirates, the Digital Currency Institute of the People’s Bank of China and the Bank for International Settlements Innovation Hub in Hong Kong.
In June 2021, the HKMA announced plans for a digital currency, the e-HKD, within its Fintech 2025 program. Policy and technical issues are being worked out. The HKMA confirms that the e-HKD will just be a digital equivalent of a banknote without affecting the monetary base. It will supplement, not disrupt the current payment system. It can replace physical cash without impacting bank deposits or credit cards.
Stephen Wong Yuen-shan, a Legislative Council member, senior vice-president of Our Hong Kong Foundation, and executive director of its Public Policy Institute, calls for retail and wholesale e-HKD to integrate cross-border use “for Hong Kong to cement its reputation as a digital finance hub and an offshore renminbi finance center”.
OHKF urges the expansion of retail cases for e-HKD from simple bill payments, public transport, government subsidy payouts, and tourist digital payments, to more complex applications like health insurance, investment in green bonds, and bond coupon payments.
OHKF also suggests a dual-currency digital wallet for e-CNY and e-HKD to facilitate cross-border transactions within the Guangdong-Hong Kong-Macao Greater Bay Area. There is, however, a policy hurdle on the quota set by the central government on e-HKD circulation within the Greater Bay Area.
Etelka Bogardi, a partner and Asia lead of global payments and fintech practice at Norton Rose Fulbright Hong Kong, urges caution on the impact of e-HKD on banks and possible disintermediation effects. She also draws attention to the need for interoperability between different systems.
ICBC International Managing Director Cheng Shi said that the launch of the e-HKD will force commercial banks and financial institutions to upgrade their technology infrastructures. “This will be a powerful external stimulus to the commercial banks and financial institutions. That will improve the payment efficiency and monetary transmission effectiveness,” Cheng said. Who will pay for that upgrade? “Incentives” are being mentioned. Will the Hong Kong government be called to fund, or heavily subsidize the banking-sector transition?
David Zou Chuanwei, chief economist at HashKey Group, a digital asset service provider, sees the e-HKD enabling user-friendly payments, high efficiency, circulation inside and outside Hong Kong to promote its global use, and support for the HKMAs Fintech 2025 strategy need for more research and innovation.
Zou calls for a public-private partnership between the HKMA, banks, and payment service providers. He points to the need for agreed rules, standards, and incentives, to drive interoperability between different market players. “Wholesale CBDCs rather than retail CBDCs are the key to improving cross-border payments. With wholesale e-HKD and the m-CBDC Bridge, Hong Kong will strengthen its role as a hub for international trade and finance,” Zou said.
The HKMA says it plans to link mBridge, eTradeConnect and Commercial Data Interchange, for seamless wholesale CBDC applications. Wholesale e-HKD raises the big questions of international convertibility, for foreign participation in the Hong Kong capital markets, trade financing, investments, initial public offerings, bonds, and other securities.
ICBC International’s Cheng pushes for the “fast-mover” advantage, to quickly upgrade the e-currency system and to expand the wholesale applications, to consolidate Hong Kong’s international financial-hub status. All of that requires a parallel development of e-currencies, and agreement on regulations, standards, and technology compatibility.
Hong Kong cannot drive this as a solo initiative. The potential of CBDCs is clear. Until there is a critical mass of regions prepared to advance it together, to an agreed timeline, the potential will remain in abeyance.
OHKF believes that Hong Kong should invite economies with mature wholesale CBDC development that share traditional financial ties with Hong Kong, such as Japan, Singapore and Switzerland, to join the mBridge connectivity. There is a global reset on Big Power relationships underway. Many traditional relationships are strained and cannot be taken for granted. It is a different Hong Kong for the international community to consider.
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