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Among the many wonders Marco Polo encountered on his journey to China in the 13th century was paper money. The Chinese invention so impressed the Venetian traveler that he observed the Mongol emperor at the time had "a more extensive command of treasure than any other sovereign in the universe."
Today, China is again at the forefront of monetary innovation. It plans to eliminate notes, which have been circulating for 1,500 years, and launch a digital-only currency. Coins will disappear, too. In preparation for becoming the world's first major economy to go fully cashless, several Chinese megacities marked the lunar year of the Ox, celebrated Feb. 12, by handing out millions of renminbi worth of digital "red packets" via a lottery. The virtual currency is supposed to circulate nationwide in time for the Winter Olympics next year. As usage spreads, the rulers of modern-day China will also exert more control over a nation's wealth than any sovereign has ever achieved.  This week in the New Economy There are three main parts to Beijing's remarkable monetary ambitions. First, digital tokens issued by the People's Bank of China will enable the state to keep tabs on the spending habits of its 1.4 billion-strong population. Chinese citizens have gotten used to the idea Big Brother is listening in on phone calls, watching them on camera and monitoring social media (Clubhouse became the latest target of Beijing's online censorship.) Now, the state will be inside their wallets, too. The architects of the system stress its potential benefits in combating fraud and corruption. It could also help fine-tune monetary policy. Analysts with Bloomberg Intelligence imagine a future in which the central bank could ease the financial burden on rural households, or struggling enterprises, by directly assigning them e-renminbi rather than by lowering interest rates—a more indirect form of relief that's slower to take effect. The downside for individuals from this monetary micro-management? A new form of state surveillance.  Visitors stand near surveillance cameras at the Badaling section of the Great Wall on Oct. 1. Photographer: Yan Cong/Bloomberg Anticipating public pushback, financial regulators have been touting the concept of "controllable anonymity," by which regular transactions would supposedly fly under the central bank's radar (except those deemed connected to criminals or terrorists). Western critics aren't convinced. A report last month by the Center for a New American Security said the digital currency "represents a significant risk to the long-held standards of financial privacy upheld in free societies." Once it has direct access to every pocketbook in the country, Beijing may be able to further control online payment giants Alipay and WeChat, which together have more than 90% of the market. The Chinese party-state has always chafed at private enterprises being in charge of consumer data. Regulators made that clear enough by derailing the listing of Ant Financial last year. The Wall Street Journal reported this week that China blocked what would have been the world's largest IPO after discovering that some beneficiaries were linked to families viewed as potential problems for Beijing's leadership. A digital currency may not cut out these payment intermediaries altogether, but it will erode their monopoly. Finally, Chinese leaders see a chance to use their virtual currency to knock the dollar off its global pedestal. Here, though, they may be in for a disappointment, if only because their goal to promote the e-renminbi in global trade and investment is at odds with their first two ambitions, which are all about state control. As one businessperson in Hong Kong told the Financial Times, "If the Communist party will get insight into every trade we do through the digital renminbi, then I think a lot of people outside China will prefer not to use it." Historically, Chinese empires collapsed when they lost control of the currency. The Mongol Yuan dynasty succumbed to financial ill-discipline, as did the subsequent Ming dynasty. The Communists took power from the Nationalists, who ran the printing presses so hot to finance war against Japan that prices increased 35 million times by one calculation. Today's Chinese leaders face a choice: they can either have absolute control over digital money circulating at home, or an international currency. They likely can't have both.
Bloomberg New Economy Conversations With Andrew Browne. Join us Feb. 23 at 10 a.m. EST for The Big "Bounce-Back," where we'll discuss the post-Covid recovery, and the outlook for investors and innovation. Will a flood of consumer spending rescue commercial real estate or bolster online giants? Can business travel recover and does Big Oil have a future? Will Asia remain ascendant or will Europe become a rival? Register here. This conversation is brought to you by IDA Ireland.
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