China: Mobile Payments, Cash and CBDC (2024)

AliPay, from Alibaba’s fintech affiliate Ant Group, and WeChat Pay, from the gaming company Tencent, dominate mobile payments in China, with penetration rates of 93% and 86%, according to Daxue Consulting. Founded in 1999, Alibaba introduced AliPay (an online digital payments solution) in 2003 and launched a mobile e-wallet in 2008. Tencent released an online payments solution (Tenpay) in 2005; in 2013, it merged it with WeChat (established in 2011).

AliPay and WeChatPay employ QR codes; their wallets link to e-commerce, utility bills, investment, and insurance products.

  • “The new paymentA transfer of funds which discharges an obligation on the part of a payer vis-à-vis a payee. More system has replaced cards and cashMoney in physical form such as banknotes and coins. More at registers, how families give gifts, and even how beggars ask for moneyFrom the Latin word moneta, nickname that was given by Romans to the goddess Juno because there was a minting workshop next to her temple. Money is any item that is generally accepted as payment for goods and services and repayment of debts, such as taxes, in a particular region, country or socio-economic context. Its onset dates back to the origins of humanity and its physical representation has taken on very varied forms until the appearance of metal coins. The banknote, a typical representati... More, with QR codes replacing tin cups,” says Aaron Klein, senior fellow from the Brookings Institution.
  • “Credit cards were never prevalent in China. The country skipped over a generation of finance and went straight to smartphone-based digital payments.” says Ray Zhong, New York Times journalist.

Mobile payments have displaced cash in retail transactions. However, cash-on-delivery (COD) remains dominant for online shopping. Platforms such as Dangdang, Amazon, and JD.com allow customers to pay using cash, certified checks, or money order.

  • “Seamlessly integrating ordering and payment helps avoid having to compete with cash. Whereas for an in-store transaction like buying a pizza, the choice between cash and mobile payments is not self-evident, when ordering through this new approach, the payment is already made by the time the pizza is delivered,” says financial inclusionA process by which individuals and businesses can access appropriate, affordable, and timely financial products and services. These include banking, loan, equity, and insurance products. While it is recognised that not all individuals need or want financial services, the goal of financial inclusion is to remove all barriers, both supply side and demand side. Supply side barriers stem from financial institutions themselves. They often indicate poor financial infrastructure, and include lack of ne... More partnership CGAP.
  • “The existing system is owned by private companies. Should AliPay or WeChat pay go bankrupt, which is extremely unlikely, it creates systematic risk,” says Linghao Bao, an analyst at Trivium China.

China is a large country with vast territory, large population, multiple ethnic groups and wide differences in regional development. In such a society, people’s payment habits, age and security needs vary. Therefore, physical RMB [money] enjoys advantages that could not be replaced by other means of payment. As long as there is demand for the physical RMB, the [central bank] will neither stop supplying it, nor replace it via administrative order. – PBoC (2021: 5)

The rise of digital payments prompted the People’s Bank of China (PBoC) to explore the digital yuan (e-CNY) to “diversify the forms of cash provided to the public by the central bank, satisfy the public’s demand for digital cash and support financial inclusion” (PBoC 2021: 4).

  • “There is a pressing need to digitalize cash and coins (M0) because: i) cash and coinA coin is a small, flat, round piece of metal alloy (or combination of metals) used primarily as legal tender. Issued by government, they are standardised in weight and composition and are produced at ‘mints’. More issuance, printing/production, withdrawal and storage are expensive; ii) cash and coin circulation is based on multiple layers; iii) cash and coins are not very convenient to use; iv) it is relatively easy to counterfeitThe reproduction or alteration of a document or security element with the intent to deceive the public. A counterfeit banknote looks authentic and has been manufactured or altered fraudulently. In most countries, currency counterfeiting is a criminal offence under the criminal code. More cash or coins, and they are used anonymously and thus may be used for illegal purposes,” wrote Fan Yifai, PBoC deputy governor.

The PBoC has launched e-CNY pilot programs since 2019 in cities including Beijing, Shanghai, Shenzhen, Suzhou, and Chengdu.

  • Visitors to the 2022 Beijing Winter Olympics could exchangeThe Eurosystem comprises the European Central Bank and the national central banks of those countries that have adopted the euro. More foreign currencyThe money used in a particular country at a particular time, like dollar, yen, euro, etc., consisting of banknotes and coins, that does not require endorsement as a medium of exchange. More for e-CNYand use cards or mobile apps at the Olympic Village, McDonald’s, Starbucks, and Subway.
  • According to the South China Morning Post, the e-CNY app has been available for public download for about a year, but it continues to be an uphill battle to convince consumers to use it. Between the launch of the pilot in December 2019 and the end of this August, total transactions involving the digital yuanrose just 14% to reach CNY100 billion ($14 billion).

The digital yuan might increase government surveillance and social control.

  • “Chinese policymakers are trying to not just create a technical infrastructure, but an institutional environment that makes this kind of currency that has social control implications more acceptable in the long run,” says Emily Jin, a researcher at the Center for a New American Security.
  • “If somebody goes crosswise with the government, suddenly their e-wallets could disappear, or they can’t even get in a taxi or go to a restaurant,” says Jeremy Mark, a senior fellow at the Atlantic Council.

At the end of December 2022, e-CNY in circulation accounted for less than 0.13% of currency in circulation. (PBoC)

According to a 2019 PBoC survey, mobile payments dominate retail transactions in China (see Chart 1). While 46% of respondents said they had used no cash during the survey, cash usage remains strong among older people and rural populations (PBoC 2021: 2).

Chart 1. China: Payment Instrument’s Usage

Note: Percentages reported do not add to 100%. Source: PBoC (2021: 2).

The PBoC has forbidden discrimination against cash users by merchants who accept only digital payments. “Cash is the most basic means of payment. Entities or individuals cannot refuse to accept it,” said the PBoC.

According to the World Bank’s Global Financial Inclusion Database, in2021

  • 88.7% of Chinese people (age 15 and older) had a financial institution account.
  • 75.8% owned a debit card, but only 38% had a credit card.
  • 86.2% had made or received digital payments.
  • In 2017, 38.3% used a mobile phone or the internet to access a financial institution account.

Graph 1 shows that currency in circulation grew between 2006 and 2022, albeit more slowly between 2015 and 2021, according to PBoC data. Currency in circulation peaks during the Chinese New Year festivities (January or February).

Graph 1. China: Currency in Circulation, January 2006-October 2022

Source: PBoC Money and Banking Statistics – Money Supply – Currency in Circulation M0, several years (2022).

  • Starting in November 2019 (when Wuhan registered the first cases of Covid-19), currency in circulation grew more rapidly. Physical money in the hands of the public jumped 20.8% between January and February 2020. Cash in circulation grew 10.95% in February 2020 and 10.78% in March 2020 compared to its value the year before.
  • Currency in circulation has grown at least 9.9% every month since March 2022 (compared to the same months of 2021).

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I am an expert in the field of digital payments, particularly focusing on the Chinese market. My expertise is grounded in a deep understanding of the evolution and dynamics of mobile payment systems, with a specific emphasis on AliPay and WeChat Pay.

The information provided in the article showcases the dominance of AliPay and WeChat Pay in the Chinese mobile payments landscape. These platforms, introduced by Alibaba and Tencent respectively, have achieved remarkable penetration rates of 93% and 86%, according to Daxue Consulting. AliPay was launched in 2003 as an online digital payments solution and expanded to include a mobile e-wallet in 2008. On the other hand, Tencent released an online payments solution called Tenpay in 2005, merging it with WeChat in 2013.

Both AliPay and WeChat Pay utilize QR codes, linking their digital wallets to various services such as e-commerce, utility bills, investment, and insurance products. Notably, the rise of mobile payments in China has led to a significant reduction in the use of credit cards, with the country skipping over a generation of finance and adopting smartphone-based digital payments directly.

While mobile payments have largely displaced cash in retail transactions, cash-on-delivery (COD) remains dominant for online shopping. However, the integration of ordering and payment processes aims to make mobile payments more seamless, reducing the need to compete with cash.

The article also delves into the People's Bank of China's (PBoC) exploration of the digital yuan (e-CNY) to diversify forms of cash, satisfy public demand for digital cash, and support financial inclusion. Pilot programs for e-CNY have been initiated in various cities since 2019, with the digital currency being tested at the 2022 Beijing Winter Olympics.

Despite efforts to promote the digital yuan, there are challenges in convincing consumers to adopt it fully. Concerns about government surveillance and social control have been raised, with the potential for e-wallets to be restricted or controlled based on individual behavior.

The PBoC has also taken steps to ensure that discrimination against cash users is forbidden, emphasizing the importance of cash as the most basic means of payment.

Finally, the article provides data on the growth of mobile payments in China, with a focus on the percentage of people using financial institutions, debit cards, credit cards, and making digital payments. The World Bank's Global Financial Inclusion Database indicates high rates of financial inclusion in China, with significant mobile payment usage.

If you have any specific questions or if there's a particular aspect you'd like more information on, feel free to ask.

China: Mobile Payments, Cash and CBDC (2024)
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