Blockchain & China’s Quest for Financial Dominance

 By Kanchana Ramanujam
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In today’s technology-driven world, tech-dominance is essential to increasing the profile and influence of a country. This seems to be the core thought driving China which has made pursuit of technology, especially ones with disruptive potential, as one of the critical pillars of achieving the ‘Chinese Dream’. Another equally important reason perhaps, for such focused pursuit of cutting-edge technology is that technological empowerment of people at the cost of the centralised control exercised by the Communist Party of China (CPC) is not something that the latter would desire. This necessitates that China remain one step ahead in the technology race so as to Sinicise technology, i.e, keep technology under the Party’s ultimate control.

Many new technologies have proven to be disruptive. This means that China has the opportunity to employ its ‘corner overtaking strategy’ by pursuing disruptive technologies and try to eliminate China’s dependence on the US for core and foundational technologies.

One major area of concern for China is how the US has been able to dictate/impact the foreign policies of other countries owing to its dominance of the global financial system. China sees blockchain technology as the window to change this ‘dollar advantage’. Hence, after 5G and artificial intelligence, there is a state-led pursuit of the blockchain technology.

In 2016, China rightly listed blockchain as a ‘strategic frontier technology’.[1] Blockchain was also mentioned in China’s 13thFive-Year Plan.[2]JD.com has already launched blockchain-based solutions such as those pertaining to tracking the supply chains of pharmaceuticals and food material.[3], [4]In fact, the Cooperation between China and Central and Eastern European Countries (China –  CEEC) has founded the China-CEEC Blockchain Centre of Excellence for research in the distributed ledger technology.[5] China leads the race in blockchain patent filing. E-commerce giants such as Alibaba Group Holding have embraced the technology and have even topped the corporate list of blockchain-related filing of patents.[6]

So, what exactly is the blockchain technology? Put in layman terms, blockchain is a data record that is time-stamped and is virtually uneditable. It is managed by a cluster of computers (as opposed to a single authority) and the information is open for everyone to access. Hence, de-centralisation and transparency are the two defining features of blockchain. This leads one to question as to why a government that is characterised by opacity of functioning and centralisation of power is pursuing a technology which, to the casual eye, appears very antithetical to its values. The answer to this is that China is not pursuing disruptive technologies alone; it is pursuing disruptive technologies with Chinese characteristics; which here would mean ultimate state-control.

While President Xi Jinping embraced blockchain technology asking for strengthening the “basic research” and boosting “innovation capacity” in the field,[7]China also took steps to completely shut down the country’s crypto-currency exchanges and ban trading of digital crypto-currency.[8] China’s acceptance and push to blockchain technology should not be mistaken to be its acceptance of crypto-currency, as the latter is inherently de-centralised (i.e., self-sovereign).

The Chinese, however, do understand the value of digital currencies given that they have a record number of mobile payments – so much so that the central bank in China had to urge individuals and companies not to refuse cash payments![9]

The People’s Bank of China (PBoC) is in the process of studying Digital Currency Electronic Payment (DC/EP) system for issuing a digital currency using the blockchain technology. In fact, it is expected that China would soon have a state-issued digital currency – the Chinese Central Bank Digital Currency (CBDC).[10] Such a currency would afford China the following advantages –

  • It would give the CPC great control over the digital flow of currency with the ability to even track it.
  • China would have a more liquid currency. Currently, the Renminbi (RMB) is not liquid enough in the international foreign exchange markets. A digital currency would be readily available for cross-border payments.
  • It would help offset the challenge from other crypto-currencies. The CBDC would be a stable digital currency, immune to fluctuations.

Given the digital payments infrastructure that China has in terms of Alipay and WeChatPay, and the fact that China is the world’s biggest e-commerce market, the adoption of CBDC would not be difficult.  In fact, CBDC is expected to be made available through four state-owned banks and online payment platforms of Tencent (WeChat Pay), China UnionPay and Ant Financial (AliPay).[11]

While the work on CBDC started much before the announcement of the launch of Libra by Facebook (China set up a PBoC-backed research institute to study state-issued digital currency in 2016),[12]the exclusion of RMB from the basket of fiat currencies that Libra was tied to, would have certainly given China the impetus to expedite the work on it. China will, in all probability, tie the CBDC to the Belt and Road Initiative, internationalising the CBDC.

China talks about ‘intelligentized warfare’ in its White Papers on defence and is pursuing intelligentisation in multiple facets of comprehensive national power, in confirmation with its idea of ‘unrestricted warfare’ and the ‘Chinese Dream’.

FinTech has been a major disruptor and blockchain is going to revolutionise economic activities of the future. Pursuit of blockchain is indeed the pursuit of future financial dominance.

[1]Xinhuanet.com. (2019). Xinhua Headlines: China embraces blockchain as next frontier for digital future – Xinhua | English.news.cn. [online] Available at: http://www.xinhuanet.com/english/2019-11/07/c_138536845.htm  [Accessed 6 Dec. 2019].

[2]Xinhuanet.com. (2017). Chinese bank announces first blockchain financial service- Xinhua | English.news.cn. [online] Available at: http://www.xinhuanet.com//english/2017-01/10/c_135970680.htm  [Accessed 6 Dec. 2019].

[3]JD Corporate Blog. (n.d.). JD Launches Blockchain Based Pharmaceutical Tracking Solution – JD Corporate Blog. [online] Available at: https://jdcorporateblog.com/jd-launches-blockchain-based-pharmaceutical-tracking-solution/  [Accessed 9 Dec. 2019].

[4]JD Corporate Blog. (2018). JD Launches Blockchain Open Platform – JD Corporate Blog. [online] Available at: https://jdcorporateblog.com/jd-launches-blockchain-open-platform/  [Accessed 9 Dec. 2019].

[5] See, https://blockchaincoe.org/

[6]Hashimoto, T. and Cho, Y. (2019). China triples US in blockchain patent filings. [online] Nikkei Asian Review. Available at: https://asia.nikkei.com/Business/China-tech/China-triples-US-in-blockchain-patent-filings  [Accessed 7 Dec. 2019].

[7]Xinhuanet.com. (2019). Xi stresses development, application of blockchain technology. [online] Available at: http://www.xinhuanet.com/english/2019-10/25/c_138503254.htm  [Accessed 7 Dec. 2019].

[8]Chinadaily.com.cn. (2019). China moves to shut down cryptocurrency exchanges. [online] Available at: http://www.chinadaily.com.cn/business/2017-09/19/content_32205975.htm  [Accessed 8 Dec. 2019].

[9]Lee, A. (2018). China is not all cashless as central bank says cash payment is alive. [online] South China Morning Post. Available at: https://www.scmp.com/business/money/article/2155223/china-goes-increasingly-cashless-pboc-says-cash-payment-still-alive  [Accessed 8 Dec. 2019].

[10]Xinhuanet.com. (2019). China’s digital currency may be world’s first: newspaper. [online] Available at: http://www.xinhuanet.com/english/2019-09/04/c_138364199.htm  [Accessed 7 Dec. 2019].

[11]Tang, F. (2019). China has ‘no timetable’ for launch of its digital currency, says central bank governor. [online] South China Morning Post. Available at: https://www.scmp.com/economy/global-economy/article/3030120/china-has-no-timetable-launch-its-digital-currency-says  [Accessed 9 Dec. 2019].

[12] Ibid.