Signage for the digital yuan at a self check-out counter inside a supermarket in Shenzhen on November 20, 2020. Photo: Yan Cong
Opinion
The View
by Richard Harris
The View
by Richard Harris
How China-led digital payment revolution is making bills, coins and some currencies obsolete
Many of the world’s central banks are looking at digitising their currencies and providing individual bank accounts from birth to handle government transactions
As banknotes and coins go out of circulation, we could be left with several virtual bank accounts and a few virtual currencies, all run by one smartphone
Three-quarters of the way into town and already late for a meeting, I reached for my wallet. My beloved stash of crumpled bank notes, crushed receipts and fraying credit cards was not there.
I had rushed out without a thought and left it at home, but it did not matter. I have my credit cards and Octopus card in my smartphone, as well as on my smartwatch. My brain might have let me down, but the electronics did not.
Needless to say, I traversed a day of meetings without needing any grubby banknotes. My only inconvenience was that I was unable to take a taxi, one of the few Hong Kong transport options that remains in the land of the Luddite.
The ease with which I was able to accomplish a day’s business and shopping without any banknotes or jangling change shows how our basic exchange economy is changing. In the last few years, this occurred in China through WeChat and Alipay, but elsewhere the pandemic has dramatically shortened the life of analogue cash by encouraging the use of non-cash payments. Much of Europe and Britain has leapfrogged Hong Kong by removing the need to use cash at all, even in the smallest outlet.
The QR payment code for WeChat Pay is displayed beside a book about Chinese President Xi Jinping at a newsstand in Beijing in August 2020. China has emerged as a world leader in digital payments. Photo: AFP
Many of the world’s central banks, who authorise the issuance of cash as notes and coins, are actively looking at digitising national currencies, with the People’s Bank of China leading the charge. It does not really matter who is first, apart from bragging rights, but it is leading a process whereby banknotes and worn-out pockets will disappear.
The bright range of Hong Kong’s designer currency will be missed. Other countries’ dull, boring bills smeared with dirt and the bagfuls of coins that accumulated down the back of the sofa will not be missed. In China, the ubiquitous 100 yuan note is all but obsolete – a relief for anyone who just years ago had to pay in cash for purchases either very small or very big.
It bears a thought as to where this is leading. Alongside digitising their currency, some central banks are investigating a form of individual bank account provided at birth to handle government transactions, such as pensions and welfare payments throughout an individual’s life. The UK has had a popular national savings bank since 1861, which raises about 9 per cent of the government’s debt.
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This competes with regular commercial banks and technically bears less risk, but commercial banks have already had to morph away from the old 3-6-3 business model to survive. “Borrow at 3, lend at 6 and be on the golf course by 3” has been overtaken by their best borrowers finding sources of non-bank cash.
Yet, do not spare a tear for commercial banks as rising long-term rates will steepen the yield curve – remember, borrow short and lend long. Much bank lending is now specialist and arguably higher margin, though Credit Suisse will testify that it is not without risk.
02:40
How mobile payments impact people’s lives in China
How mobile payments impact people’s lives in China
Taking the thinking even further, digital money could concentrate into just a few preferred currencies. For trade and global transactions, wouldn’t it be easier to have just a few settlement currencies? We need national currencies to go down to the local shops. Currency nationalism means that domestic legal tender laws will usually be enforced. But as more transactions will be with the Alibabas, Amazons and Googles of the world, though, it might be easier for people to earn, spend and save in just a few currencies.
The US dollar and euro are obvious candidates, and the British pound still has a surprising presence in international transactions. The Chinese yuan will certainly be a player because of China’s presence as a global trader – and because a lot of people use it. The safe haven Swiss franc and Japanese yen will be there, but there will be little room in a digital wallet for Indonesian rupiah, Mexican peso and South African rand, let alone the Argentine peso, Venezuelan bolívar and Zimbabwe dollar.
Digital currencies will make life harder for small fraudsters, criminals and tax dodgers, although the recent Archegos, Greensill and Wirecard scandals show we cannot get away from poor human decision-making. Digital currencies will make bitcoin irrelevant for all but anti-government conspiracy theorists, criminals and the corrupt, consigning the digital token to a footnote of history – unless it causes a systemic crash in the meantime.
02:12
What are cryptocurrencies?
What are cryptocurrencies?
The golden rule – those who have the gold make the rules – will consolidate more power in the hands of national governments, and it will be much easier to do that digitally. The ordinary person in the street might become more honest, but can we trust our leaders not to print, spend and bribe their electorates or supporters? Governments will know more about individuals and their spending habits than Facebook.
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As banknotes and coins go out of circulation, we will be left with several virtual bank accounts and a few virtual currencies, all run by one smartphone. Access to that will have to become more difficult than just using your mugshot, fingerprint or a simple password.
Richard Harris is chief executive of Port Shelter Investment and is a veteran investment manager, banker, writer and broadcaster and financial expert witness
