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Analysis: China digital currency trials show a threat to Alipay, WeChat duopoly

analysis china digital currency trials show a threat to alipay, wechat duopoly
A sign indicating digital yuan, also referred to as e-CNY, is pictured at a shopping mall in Shanghai, China April 21, 2021. REUTERS/Aly Song

Shanghai – In China’s commercial hub Shanghai, six big state banks are silently promoting digital yuan ahead of a May 5 shopping holiday, carrying out a political mandate to provide customers with a payment choice to Alipay and WeChat Pay.

The banks are influencing retailers and direct clients to download digital wallets so that transactions through the pilot program can be made directly in digital yuan, avoiding the ubiquitous payment plumbing laid by tech giants Ant Group, an affiliate of Alibaba 9988.HK, and Tencent 0700.HK.

“People will understand that digital yuan payment is so convenient that I don’t have to rely on Alipay or WeChat Pay anymore,” said a bank official suggested in the rollout of e-CNY for the Shanghai trial, under the administration of China’s central bank. The official is not approved to speak with the media and refused to be identified.

China’s development of a sovereign digital currency, which is far ahead of related initiatives in other major economics, looks more poised to erode the dominance of Ant Group’s Alipay and Tencent’s WeChat Pay in online cash.

That turf invasion agrees with Beijing’s expanding effort to clamp down on anticompetitive behavior in the internet sector, part of a full reining in of the clout of sector heavyweights.

Regulators scuppered Ant’s record $37 billion IPO in November and earlier this month imposed a sweeping restructuring on the fintech conglomerate controlled by Jack Ma. Ma’s Alibaba Group Holdings was recently hit with a record $2.8 billion antitrust penalty.

In public, the People’s Bank of China (PBOC) says e-CNY won’t compete with AliPay or WeChat Pay and serves only as a “backup” or “redundancy.” (Full Story)

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But in private, state banks marketing the digital fiat currency for the central bank bluntly describe Beijing’s intention to undercut the duo’s dominance.

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“Big data is wealth. Whoever owns data thrives,” said another banking official tasked with promoting the e-CNY.

“WeChat Pay and Alipay own an ocean of data,” so the e-CNY rollout facilitates China’s anti-trust campaign and helps the government control big data, he added.

The PBOC and Tencent declined to respond to requests for comment.

Ant declined to comment on the relationship between Alipay and e-CNY. Ant-backed MYbank said it is “one of the parties participating in the research and development” of the e-CNY and “will steadily advance the trial pursuant to the overall arrangement of the People’s Bank of China.”

DIGITAL CASH

The e-CNY digitalizes a portion of China’s physical notes and coins, or currency in circulation (M0), and was launched last year in small pilot schemes in four cities.

Under a two-tier distribution system, the PBOC issues the digital currency to banks, which pass the money to individuals and companies.

The six banks in the e-CNY pilot schemes include China’s biggest lenders, such Industrial and Commercial Bank of China, Agricultural Bank of China, Bank of China, and China Construction Bank.

“The e-CNY’s ease of use will likely be comparable to Alipay and WeChat Pay, while its security function will likely be higher, and as sophisticated as Bitcoin,” HSBC wrote in a recent report, adding that it expects the digital currency to “proliferate” within China.

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Among a slew of likely motivations cited by HSBC behind the push is the central bank’s desire to control payment channels and consumption data from Alipay and WeChat Pay.

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CONSPICUOUSLY ABSENT

Digital wallets, which are still being beta tested, can be bundled with a dozen popular apps, including Meituan, JD.com, Didi, and Bilibili, but conspicuously can not be linked WeChat or Alipay. That means none of the participating banks can transfer e-CNY between their digital wallets and the two established payment platforms.

“PBOC doesn’t want to see the money being routed through third-party payment systems,” a banker said, citing the need for “information segregation.”

The e-CNY will digitize “the last mile” of consumption, enabling banks and merchants to capture data and gain insights into spending patterns, said Wilson Chow, Global TMT Leader, PwC China.

That data is now dominated by Alipay and WeChat Pay, which control a combined 94% of China’s online payment market.

Mass adoption of the e-CNY won’t happen overnight.

Chow predicts that e-CNY will account for roughly 10% of China’s electronic payments market in a few years, co-existing with Alipay and WeChat Pay.

To entice users, bankers said the PBOC would likely give “red envelopes” of free digital cash or discounts to Shanghai citizens around the upcoming shopping festival, an event aimed at promoting spending to fuel economic recovery from COVID-19.

PBOC deputy governor Li Bo told a forum last week that domestic adoption will precede cross-border payments with e-CNY. Many analysts believe will bolster the yuan’s global status as China seeks ultimately to break the dominance of the dollar settlement system.

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“The priority of the yuan’s digitalization is currently to promote its domestic use,” Li said.

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