When COVID-19 hit China in late January 2020, the government implemented aggressive measures such as social distancing and lockdowns to stop the spread of the virus. This led to a dramatic decline in offline economic activities, especially in restaurants, hotels, cinemas, parks and shops. Yiping Huang specially for the East Asia Forum.
Meanwhile online economic activities such as e-commerce and online education programs surged. Many restaurants started offering door-to-door delivery services, and the digital economy, taking advantage of its contact-free nature, played an important role as a macroeconomic stabiliser.
This is one example of how digital technology, including ‘bigtech’ platforms, big data, artificial intelligence (AI) and cloud computing, is transforming the Chinese economy. China’s first e-commerce platform, Alibaba’s Taobao, was launched in June 2003—the month before the World Health Organization declared the SARS outbreak contained. But e-commerce did not surge until 2013, when smart phones and 3G/4G networks became widely available. Before that, online shopping was built mainly on desktop computers and 2G wireless networks, making the user experience not particularly enjoyable. By the end of 2019 online shopping had already exceeded one quarter of China’s total retail sales.
To facilitate growth in e-commerce, Alibaba had to overcome one major obstacle — online payment. A lack of trust between buyers and sellers made it hard to close online transactions. At the end of 2004 Alibaba launched what is now known as Alipay, the world’s largest mobile payment service provider. By mid-2019, Alipay had 1.2 billion users.
Alipay’s main competitor WeChat Pay was launched on that social media platform in 2013. WeChat Pay attracted a large number of users by introducing electronic red envelopes during the Chinese New Year in 2014. By mid-2019, WeChat Pay had about 900 million users.
Mobile payment is by far the most successful financial technology (fintech) product in China. Without it, the digital economic activities that helped to stabilise the macroeconomy during the COVID-19 pandemic would not have occurred. But the most important contribution of mobile payments is financial inclusion, dramatically expanding access to those left out by traditional financial institutions. With a smart phone and telecom signal, one can enjoy payment and other financial services from anywhere. Some studies show that when farmers start using mobile payment services, their job opportunities expand and their income rises.
Today, Alipay and WeChat Pay are no longer just means of payment; they have built comprehensive ‘ecosystems’ around them. Users can organise their daily lives on these ecosystems — booking hotels, calling taxis, buying plane tickets, ordering food delivery and so on.
Some large tech companies, such as Ant (the fintech arm of Alibaba) and Tencent (the company that created WeChat), started to provide credit by developing a new bigtech credit risk management system. This system contains two pillars: bigtech platforms and big data credit risk assessment.
Chinese bigtech platforms such as Taobao/Alipay and WeChat/WeChat Pay play important roles in three ways. First, they help acquire large numbers of customers at low cost, taking advantage of the platforms’ long tail feature. Second, they record customers’ digital footprints and accumulate big data for real-time monitoring of the potential borrowers’ activities, forming the input for the credit risk analysis. Finally, they may also help with repayment management.
The combination of bigtech platforms and big data credit risk assessment enables bigtech companies to grant credit to large numbers of individuals and small and medium-sized enterprises (SMEs), most of which have never borrowed from a bank. One bigtech lender, Ant-affiliated MYbank, has a ‘3-1-0’ business model: it takes less than three minutes to apply online, if approved, the money is transferred to the applicant’s account in one second, and there is zero human intervention.
In this way, each of the three Chinese bigtech lenders can grant more than 10 million loans every year. More importantly, their average non-performing loan ratio is below 2 per cent, compared with an average of 5.5 per cent for commercial banks’ SME loans (loans smaller than 5 million RMB).
Big tech credit was also behind the relatively more stable Chinese economic activity during the COVID-19 crisis. Another important contribution to macroeconomic and financial stability is removing what former US Federal Reserve chairman Ben Bernanke called the ‘financial accelerator’. Since most SME loans from commercial banks are collateralised, there is a positive feedback mechanism between property prices and credit policy.
This means that a small drop in property price may end in a financial crisis. The elasticity of collateralised credit by commercial banks with respect to local property prices is about 0.6, meaning a 10 per cent fall in property values leads to a credit squeeze of 6 per cent. This vulnerability is not shared by fintech firms, which lend based on data rather than collateral. The elasticity of MYbank credit with respect to local property prices is statistically insignificant.
Digital technology is changing the Chinese economy, making it more convenient, increasing efficiency, reducing costs, replacing labour and improving user experience. This is particularly important as China has a rapidly ageing population. In many areas, robots and AI may substitute for labour, helping to ease the labour shortage problem.
But the digital transformation has just started, and it will take time to fully understand its economic consequences. While some of the benefits are obvious, digital technology also creates problems for disadvantaged groups. For instance, there was a widely circulated news story during the COVID-19 pandemic in China of an old man who was stopped from taking the subway when he failed to produce his electronic health code. This is only one example of the potential problems that the government needs to address.
Yiping Huang is Professor and Deputy Dean at the National School of Development and Director of the Institute of Digital Finance, Peking University.