Foreign Affairs

Financial Technology Is China’s Trojan Horse

Senior Fellow
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Founder and CEO of Prism Global Management.

In one of his last acts as president, Donald Trump issued an executive order banning eight Chinese software applications, including Alipay, the world’s largest mobile payment app. People in China, and increasingly in other countries, conduct all sorts of transactions over Alipay and WeChat Pay, another app banned by Trump’s order—everything from paying electricity bills to buying food from street vendors to splurging at high-end boutiques.

Trump’s ban, issued on January 5, sought to address concerns that these popular Chinese apps might allow Beijing access to sensitive data about Americans. But China’s emerging dominance in financial technology, also known as “fintech,” poses an even more fundamental problem for the United States. Washington cannot trust that the Chinese Communist Party (CCP) will harness its growing influence in financial markets for the benefit of all. More likely, Beijing will use fintech to occupy the high ground in global commerce, bolster its surveillance state, and lay the groundwork to challenge the U.S. dollar as the world’s reserve currency.

The Trojan Horse In Your Smartphone

Mobile payment apps in China began as fun and easy ways to send “red envelope” holiday gifts to family and friends on the Lunar New Year, but they have quickly blossomed into an immense industry. Millions of Chinese consumers use digital payment technologies for everyday transactions. China’s burgeoning middle class has leapfrogged credit cards and moved straight to digital payments, whose volume now exceeds $42 trillion annually in China—nearly 150 times the volume of U.S. transactions on apps such as PayPal and Venmo.

The rise of Chinese fintech companies threatens to strengthen the world’s most pervasive surveillance state. The so-called data exhaust from billions of digital transactions supplements existing data from facial recognition, search histories, and social network connections, furnishing the CCP with GPS time and location stamps, transaction histories, travel logs, bank account details, and more. Together, this information allows Chinese authorities to closely monitor and control specific individuals and communities by reducing or canceling access to bank accounts, freezing travel routes, and denying entry to specific locations. Ominously, financial authorities in Hong Kong have recently begun asking banks to report transactions to help authorities identify pro-democracy activists.

Officials outside China are understandably concerned about how Chinese authorities might harness data generated by users in their own countries. Alipay boasts users in more than 110 countries. Indian Member of Parliament Narendra Jadhav warned in 2018 that if Chinese fintech companies gained access to the financial data of millions of Indians and of Indian companies, it would expose India to “serious geopolitical risk.” Similar fears motivated Trump’s January executive order banning Alipay, WeChat Pay, and other Chinese software applications.

But China’s dominance in fintech also promises to boost the CCP’s expansionist ambitions in another way, hardwiring other countries to China’s economy. Chinese fintech firms function like a geoeconomic Trojan horse. First, Alipay and WeChat Pay—companies that make up 95 percent of China’s mobile payments market—integrate themselves into daily economic life in another country. Then, piggybacking off this financial infrastructure, they and other Chinese firms acquire digital banking licenses and rapidly expand into other sectors, including digital insurance, consumer credit, remittances, and lending. These companies soon become too embedded in their host country to remove. In early December, for example, three of the four winners (picked from a pool of 21 applicants) of digital banking licenses in Singapore were Chinese or heavily backed by Chinese investors. U.S. and other Western companies were nowhere to be seen, leaving China with an open playing field.

China’s bid for fintech hegemony in Asia is a step toward an even bigger goal: achieving global reserve currency dominance. Last fall, analysts at the U.S. financial services firm Morgan Stanley forecast that the yuan could surpass the Japanese yen and the British pound sterling to become the world’s third-largest reserve currency by 2030, accounting for between five and ten percent of global foreign exchange reserve assets. Beijing is challenging the sway of the U.S. dollar over Southeast Asia and parts of Africa as it prepares to launch, likely within the next year, a sovereign digital yuan, which would make transactions easier and also enable China to better track how its currency is used.

Yuan For All

Consumers and merchants throughout Southeast Asia will soon be able to use the digital yuan on Alipay and WeChat Pay. Later, the apps will serve as distributors of the digital yuan as local businesses find it more efficient to use the yuan than the dollar in transactions with Chinese companies. The CCP could then push for the digital yuan to be used instead of the U.S. dollar by bigger institutions and businesses conducting large transactions, such as making interest payments and financing supply chains.

That shift has already begun—even before the release of China’s new sovereign digital currency. As bilateral trade between China and Southeast Asian countries has grown in recent decades, so has the share of trade that is conducted in Chinese yuan, eating into the U.S. dollar’s share of bilateral trade. Dino Djalal, the former Indonesian ambassador to the United States, has pointed out that Indonesia’s bilateral trade with China in 2019 was worth $79.4 billion, a tenfold increase from 2000, making it “more attractive” for Indonesian companies to use yuan when dealing with Chinese firms. The yuan’s share of bilateral trade between China and Indonesia has quadrupled in the last four years.

Countries in the region may soon begin to increase the share of yuan in their foreign currency reserves. Russia’s example may foreshadow Southeast Asia’s future in that regard. Russia dramatically upped the share of yuan in its reserves from over two percent in 2018 to over 14 percent in 2019. It also reduced its share of U.S. dollars from around 30 percent to around 10 percent during the same period. The dollar’s share in trade settlements between China and Russia has fallen from 90 percent to 46 percent since 2016.

China’s digital yuan could siphon transactions away from Western-dominated money exchange platforms such as SWIFT, the key mechanism that maintains U.S. dollar dominance in global trade. CCP officials have described SWIFT as a means for the United States to maintain “global hegemony” and reap “huge profits by virtue of the monopoly platform.” U.S. officials must take Chinese moves in this area seriously. Max Levchin, a co-founder of PayPal, believes that if the United States does not get its act together and make a digital version of the dollar more readily available, “we run the risk of letting China become the digital reserve currency of the world.” The United States will lose the leverage and influence it has over many countries if they increasingly opt for the yuan over the dollar.

Providing an Alternative

The United States must get serious about offering other countries alternatives to China’s fintech companies, tapping the strength of U.S. technology firms. And yet these firms have been slow to involve themselves in the growing competition with China. Either Alibaba or Tencent has invested in every single one of the 13 technology unicorns—startups valued at $1 billion or more—in Southeast Asia. Facebook and PayPal, by contrast, invested in their first Southeast Asian fintech player, Gojek, just last March. U.S. companies such as Facebook, Google, and PayPal must not get boxed out of the world’s most significant growth markets, which are mostly in the Indo-Pacific region. The U.S. government, meanwhile, needs to find ways to encourage its technology giants to partner with non-Chinese fintech companies around the world. It should also incentivize top U.S. venture capitalists to invest in ways that serve national interests—just as China is doing. Ultimately, the United States needs to help provide countries with an alternative to technological subordination to China.

The popular and convenient digital commercial payments systems that Chinese consumers use every day are a critical part of China’s technology-driven, autocratic surveillance state, what we term the “Sino Operating System.” Through fintech, China is determined to stake an even greater claim to the global economy and gain greater control over the global financial system. The United States still has time to prevail in this competition, but failure to act soon will force it to play a hard game of catch-up.

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