In January 2004, Jack Ma, founder of Alibaba, made one of the most consequential decisions in recent financial history. The English teacher-turned-entrepreneur was at the World Economic Forum in Davos when he decided to take on China’s backward financial system. 

Ma’s team back home in Hangzhou was nearly ready to launch Alipay, a payment system that would allow people to pay for what they ordered from Alibaba. Few Chinese at the time had credit cards, and a powerful state-owned company had a monopoly on most payments. So, Alibaba’s solution was to create its own payment system in order to fully achieve its e-commerce ambitions. The problem was that neither Ma nor Chinese officials were sure whether the system was legal. 

While hearing the world’s top CEOs speak about social responsibility, Ma made up his mind to take the risk. In the middle of the night, he called his team and said, “Set Alipay in motion immediately, at once, right now. If someone must go to prison for it, I’ll go.” 

Instead of going to jail, Ma built an empire of companies that was, at one point, worth more than a trillion dollars. Alipay would be accepted everywhere in China, along with dozens of other countries. He is the quintessential Chinese entrepreneur of the twenty-first century, among a group that took huge risks to build what has become the foundation of China’s prowess in technology. 

Indeed, the future of finance — the way Wall Street operates and how you manage your personal finances — is on the verge of upheaval. And the force underlying the change comes not from the usual suspects such as Goldman Sachs, JP Morgan Chase, or Bank of America — but China, where finance and technology are being merged into a system that could either be Orwellian or liberating. The changes of this global revolution in finance and technology (“fintech”) will be just as powerful as those wrought in social media, retailing, and advertising by giants such as Amazon, Facebook, Google, and Twitter, which have overturned how we shop and communicate.

When I moved from Berlin to Beijing in 2013 to learn Chinese and to study the rising global power’s economy, I discovered not an economic leviathan but a backward, antiquated, and low-tech financial system. The system’s primary virtue, it seemed, was that it enforced government control over people’s financial lives. 

Few anticipated then that China would be on the cutting edge of finance, bringing unprecedented financial liberty to a billion Chinese and making China the global leader in the fusion of finance and technology.

I could see the limitations through my personal experience navigating the system. When I wanted to invest my meager savings, I walked into a dusty bank branch and was offered interest rates that were capped by the government below inflation, a policy that allowed the bank to siphon off savers’ money to fill Communist Party coffers. 

Economists call this situation “financial repression” because it robs consumers of choices and funnels money to the government’s priorities. Banks offered credit cards to only an elite few. All debit cards bore the mark of the only player in the market: a state monopoly called UnionPay, and most merchants didn’t accept them. 

Everyone went about their daily transactions paying in cash, but it was hardly a convenience. Fraud was rampant, and even the tiniest local restaurant would obsessively run any bills worth more than a few dollars through a scanner to detect counterfeits. While my friends in the United States were using the Venmo app to split restaurant bills, my Chinese friends still settled up in cash. 

Few anticipated then that China would be on the cutting edge of finance, bringing unprecedented financial liberty to a billion Chinese and making China the global leader in the fusion of finance and technology. Yet Chinese fintech developed so quickly that my return to the U.S. in 2015, just two years later, felt like going back in time — leaving a world of ubiquitous mobile finance for paper checks and plastic cards. Major financial firms in the United States are now wondering how to catch up and avoid being left behind in a new wave of innovation. 

China’s fintech revolution is not just a curiosity for scholars of the middle kingdom but a preview of a potential digital financial future that is already spilling over to the rest of the world. Alipay and its main competitor, Tencent’s WeChat, have both developed a powerful new alternative to how finance is done on Wall Street. Both companies run “super-apps” more powerful than anything available outside of China, allowing their billion users to pay, borrow, invest, buy goods and services, travel, chat, and far more — all fused together in one mobile-phone application. 

Facebook founder and CEO Mark Zuckerberg’s strategy for his global empire at one point included launching a private digital currency that appears to have been inspired by Tencent’s WeChat super-app. And the U.S. government is worried about the rise of Chinese internet firms that are now strong enough and advanced enough to compete with Silicon Valley. It blocked Jack Ma’s attempt to buy a U.S. payment company regularly used by members of the American military and attempted to ban WeChat Pay in the United States. 

Still, Chinese tech companies now compete all over the world with U.S. tech firms. Alipay is accepted everywhere from Walgreens stores in Washington, D.C., to shops in Thailand that waved away my plastic American credit cards as useless relics. And even if governments ban these Chinese companies, their ideas cannot be contained within China’s borders. 

TURNING POINT

Many outside of China are familiar with the stories of Jack Ma and “Pony” Ma Huateng, the founder of Tencent. But the third larger-than-life character who brought this fintech revolution about is Zhou Xiaochuan, the central-bank governor who helped these upstarts with loose regulation and political protection. 

Zhou is a “princeling,” son of a high-ranking official who once was a mentor to Jiang Zemin, the general secretary of the Chinese Communist Party from 1989 to 2002. He started his career just when China began moving away from a command economy to one that was more market-based, and he designed reforms by looking abroad for economic and financial expertise that did not yet exist in China.

He was also an early supporter of developing Chinese finance through new technology. Following a trip abroad in the early 1990s, Zhou — who was then vice president of the state owned Bank of China — arrived back in Beijing convinced that the internet was the future of finance. He had just returned from a banking conference where every person attending received a floppy disk with software to go online and send emails. He saw a chance to make a big difference back home, where no one was using the internet even though the necessary ingredients like computers and telecom connections existed. When he dropped by the state telecom bureau to request an email account for the Bank of China, surprised workers informed him that he was the first person in the city to ask for one.

Yet even with forward-looking leaders like Zhou heading the central bank, some crucial financial reforms in China had stalled by the mid-2000s as political resistance kept banks from evolving fully into commercial institutions.

Zhou went on to become one of the country’s most powerful officials and fintech’s most important protector. By designing key financial reforms in China, he made sure that incumbents could not use political power to end fintech’s disruptions to monopolies. As a report coauthored by the World Bank and the People’s Bank of China (PBOC) later put it, “Chinese regulatory authorities initially took a ‘wait and see’ approach, allowing the emerging industry to innovate and grow with relatively few restrictions.”

Yet even with forward-looking leaders like Zhou heading the central bank, some crucial financial reforms in China had stalled by the mid-2000s as political resistance kept banks from evolving fully into commercial institutions. It wasn’t until 2012 that it became clear changes were needed to avert a potential crisis in economic growth. 

Thanks to sluggish global growth after the financial crisis of 2008, demand for Chinese exports from abroad had slowed, while a flood of credit used for government-led investment had produced much more debt. As a result, Chinese policy makers faced an alarming situation in 2012: Growth fell sharply to under 8 percent while debt ballooned to 190 percent of GDP.

If growth kept declining, the ever-larger debt would be harder to repay, raising risks for China’s banks and its economy. The divergence between growth and credit also suggested that credit was being poorly allocated, wasted on projects and companies that were not contributing to growth. 

Finance would need to change to support new sources of growth for the future. The objective would be to encourage strong domestic consumption as well as innovation and efficiency gains to drive growth that investment and exports could not. 

But to do this, the financial repression that benefited state banks would need to be revised. Squeezing depositors depressed consumption, and government-directed lending starved companies and households of the loans they needed to innovate and consume. 

Premier Wen Jiabao, China’s top-ranking economic official, gave a biting criticism of the banks in early 2012: “Frankly, our banks make profits far too easily. Why? Because a small number of major banks occupy a monopoly position, meaning one can only go to them for loans and capital. . . . That’s why right now, as we’re dealing with the issue of getting private capital into the finance sector, essentially, that means we have to break up their monopoly.”

This remarkably frank statement was a signal to the bureaucracy that it should remove barriers to entry for private firms in financial services, even if this step would threaten state-owned incumbents. A few months later, the central bank’s plan for financial reform announced that it would open up finance more to private capital. 

China’s fintech revolution began in earnest in June 2013, when hundreds of millions of regular Chinese took nearly $100 billion out of the state-backed banks to entrust to Yu’E Bao, an investment fund that one could buy online. In doing so, Jack Ma took advantage of the reforms put in motion by Wen, Zhou, and the Securities regulator that had just opened up the business of selling investment funds to tech firms like Alibaba.

Ma offered savers 6 percent interest on money they could use anytime, far better than the state banks’ offer of zero. Banks raised their rates and tried to compete, but Yu’E Bao still became the world’s largest money-market fund, outpacing global giants like JP Morgan and Vanguard. 

With Zhou helping to clear the way, Alibaba and Tencent went on to blow up financial repression across China, forcing innovation and competition on a sclerotic banking system. 

In fact, Tencent and Alibaba’s competition with each other led to an arms race of bundling, adding more and more financial tools with services such as social media and e-commerce to their apps. Their “super apps” became more akin to operating systems that host many apps in them, allowing their billion users to pay, borrow, invest, buy goods and services, travel, chat, and far more all fused together in one mobile-phone application. In the process, they gathered an unprecedented breadth of data and unlocked a business model more powerful than anything that global giants like Facebook or Google have managed — one that would be perceived as threatening the Communist Party.

Nearly a decade after I walked into that decrepit bank in Beijing, mobile payments are now so ubiquitous that beggars hang QR codes for Good Samaritans to scan for donations because no one carries cash.

While Silicon Valley has changed little about how most Americans pay, the financial lives of people in China no longer revolve around governments and banks but around tech ecosystems. Nearly a decade after I walked into that decrepit bank in Beijing, mobile payments are now so ubiquitous that beggars hang QR codes for Good Samaritans to scan for donations because no one carries cash. Citibank is now sending its bankers to China to get an early glimpse of the future, where lightning-fast payment systems are far cheaper than U.S. credit-card payment systems. After visiting Shanghai, one such observer said: “If you’re a banker in the United States, trying to envision what consumer banking could be like, this is pretty close to the end state.” 

While the rest of the world needs to learn from the power of what China has unleashed and where it is leading, the reinvention of money and finance in China also poses enormous risks. 

DIGITAL HAVES AND HAVE-NOTS

In late 2020 authorities in southern China’s Guangdong pioneered a new form of cruel punishment to deter criminals. Instead of the traditional methods of prison, labor camps or fines, perpetrators would be free but would be subject to a five-year ban on digital payments — in one fell swoop making them outcasts excluded from the modern, convenient economy that financial technology brought into being.

It is a testament to the rapid, revolutionary change in China that a tool leaping from the fringe to the mainstream just a few years ago is now so essential to daily life that being denied its use is deemed sufficient punishment for some crimes. 

The link between police action and digital payments also vividly illustrates how governments might leverage these tools as concentrated points of control over the population, separating people out into digital haves and have-nots. For better or for worse, as finance goes digital, more of it can be tracked and controlled by both big tech firms and governments, and China is the world’s laboratory for these changes. 

During COVID, fintech apps became a new locus of control for the Chinese population. The apps helped the government determine who was not a health risk and who was confined to a red code on their Alipay app, meaning forced home isolation. The program helped China successfully handle the pandemic for years while infections raged abroad, and it showed the ability of Chinese tech to help its country, but at the same time it gave a glimpse of a scary potential future of app-based government control.

The fintech revolution, for example, may be poised to deepen China’s authoritarian control over its people’s lives, inspiring the government to take control with its own initiatives like social credit, a digital tool for social control that brings Mao-era dossiers of political loyalty into the twenty-first century. After accusing an official of corruption, investigative journalist Liu Hu found himself on an automated blacklist that prevented him from getting a loan, buying many goods, or even taking a fast train. Millions more get added to those blacklists every year. 

Fintech companies and their users have been dragged into the net of control as the Party has consolidated its grasp over China’s economy and technology sector. China is the first major economy to undergo trials of a central-bank digital currency (CBDC). The initiative’s aim is to shape the future of digital currency and blockchain rather than being forced to react to innovations like Bitcoin or Libra originating in societies with values different from those of China. 

But a central-bank-backed digital currency, the most advanced of any major economy, will enable real-time government tracking and control for every transaction anyone makes. If the new digital currency fully replaces paper cash, the Chinese people will no longer have a way to transact with full anonymity. 

As China’s politics becomes even more authoritarian and statist, the innovative new financial system built by China’s entrepreneurs may well be replaced by one focused on control and surveillance. Fintech would then cease to be the force for financial freedom in China that Ma made a reality for so many years. 

This article has been excerpted from The Cashless Revolution: China’s Reinvention of Money and the End of America’s Domination of Finance and Technology by Martin Chorzempa. Copyright © 2022. Available from PublicAffairs, an imprint of Perseus Books, LLC, a subsidiary of Hachette Book Group, Inc.

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