In the same week the British Treasury announced new proposals to help maintain access to physical cash, around 50,000 people in China were handed 200 digital yuan, around £23, each.
Much in the way the UK government handed out ‘helicopter money’ to those eating out to help out in August, China’s version last week had the dual objective of pumping some cash into the economy while also encouraging citizens to spend digitally using their smart phones.
The trial of China’s digital currency, known as the DCEP, took place in the city of Shenzhen, in the south of China near the border with Hong Kong, last week and was massively oversubscribed with just under 2million people applying to take part.
The 2.6 per cent of applicants selected by lottery were given a ‘red packet’ of 200 yuan each through a state-run mobile app which could be spent in just under 3,400 shops in a district of the city by scanning a QR code.
50,000 people in the Chinese city of Shenzhen were given 200 yuan, or around £23 in ‘digital helicopter money’, in a one-week trial as China continued to test its digital currency
One shop which participated in the trial told the state-controlled international broadcaster CGTN that ‘around 10 people a day’ were using the digital version of China’s currency to pay for things in store.
Those looking to spend using the app could also do this without needing access to the internet for the system to work.
What’s going on here?
The giveaway was designed to stimulate consumer spending to aid China’s recovery from the coronavirus pandemic.
Figures released Monday revealed the world’s second-largest economy has largely bounced back, growing 4.9 per cent between July and September compared to the same three month period last year.
Retail sales were up 3.3 per cent year-on-year last month, as domestic spending also recovered.
But as well as a short-term attempt at jump-starting the economy, the trial is just the latest step in China’s attempt to digitalise its currency, something it has been working on for six years.
What’s the difference between the yuan and renminbi?
The renminbi is the name of the currency and means the people’s money.
It’s akin to the UK calling its pound sterling.
The yuan, whose symbol is ¥, is the unit of this currency – like our pounds and pence.
The DCEP, or Digital Currency Electronic Payment, is the name for the digital version of yuan the Chinese government has been working on for the last four years.
Spending is still still measured in ¥.
Alipay and WeChat Pay allow users to make payments from a bank account with a Chinese commercial bank by scanning a QR code – these are also digital but do not come under the DCEP as they’re private companies, albeit publicly listed.
The DCEP – simply a digital version of the Chinese renminbi – has already been used in 3.13million transactions worth ¥1.09billion or £125million through previous pilots this year across four cities including Shenzhen.
One person in Shenzhen who applied unsuccessfully for the ¥200 or £23 windfall, Shirley Xu, told This is Money: ‘I signed up because I’m very interested in DCEP and want to have a first look at how it works.’
Shane Happach, head of global ecommerce at the payments processor Worldpay, said: ‘The Shenzhen red packet initiative, is not dissimilar to stimulus packages that other economies have adopted, such as Singapore’s tourism vouchers scheme, or even the UKs ‘Eat Out to Help Out’ scheme, but it is savvy that they are also using it as a moment to encourage adoption of the renminbi app.’
How does digital helicopter money work?
Users who have an account with one of China’s four biggest banks can link it to the app and add it to their personal digit wallet – another app on most smart phones.
When it comes to paying, users scan a printed QR code in shops participating in the trial.
In contrast to the UK, where the likes of Apple Pay effectively digitalise an existing bank card, these digital wallets do not use debit or credit cards to function, and instead largely use smartphone apps linked to bank accounts, and QR codes.
‘China’s payment system has evolved into a framework based on non-bank payment platforms and QR codes…in sharp contrast to the Western, bank-centric, card-based model,’ Aaron Klein, a fellow at the Brookings Institute wrote in April this year.
He told This is Money: ‘China’s payment system evolved quickly from a cash-based system where the banks were waiting for people to move to cards that they controlled into a QR-based system run through Alipay and WeChat Pay.
While increasing numbers of Britons use the likes of Apple Pay or Google Pay, the country is far behind China when it comes to the use of digital wallets
‘The speed, magnitude, and breadth of this change caught everyone by surprise. The result is a payment system that largely disintermediates the banks, an outcome unique in developed economies.’
Shirley Xu added: ‘China is really big on QR code payments and mobile wallets. With a smartphone in hand, you can buy anything and go anywhere. We don’t need to bring any cash with us every day as long as we make sure our phone is fully charged.
‘China’s eWallet payments are so convenient, they can meet everyone’s daily requirements.’
The trial in Shenzhen, visited last week by Chinese president Xi Jinping, is not being run through either of China’s tech titans, but by the Chinese government itself.
The explosion in digital wallet usage in China is largely down to two companies: Ant, which runs Alipay and will soon debut on the stock market, and Tencent, which runs WeChat Pay
There have been ‘various incentives’ behind the development of the DCEP, Klein added, with the attempt by the Chinese government to muscle in on the territory of Ant and Tencent potentially due to a digital currency leaving it better able to keep an eye on the spending of its citizens.
‘Although there is little change from the perspective of user use, from the perspective of central bank supervision, future forms of finance, payment, business and social governance, this is the biggest thing ever’, Xu Yuan, an associate professor at Peking University, told the Chinese broadcaster CCTV in April.
There are geopolitical concerns for China too, as it seeks to build an alternative to rival the dollar and stay ahead of the likes of Facebook, which announced last year it wished to develop its own currency.
‘China realises they are the global leader in QR-based payments, so why not innovate and expand on it,’ Klein said. ‘China is leading the movement to digital currency today.’
The digital giveaway is modelled on the Chinese practice of gifting money to friends and relatives through red envelopes
Will the UK switch to digital spending?
The use of Apple Pay, Google Pay and Samsung Pay is an increasingly familiar sight in the UK, with close to a fifth of adults registering to use these digital wallets last year.
Digital spending is expected to become more common following the coronavirus pandemic, with the government encouraging businesses and people to use contactless payments wherever possible.
Unlike using a debit or credit card which caps contactless payments at £45 per transaction, contactless spending through a digital wallet via your smart phone or watch has no upper limit.
A spokesperson for the payments company PayPal told This is Money: ‘The coronavirus pandemic has accelerated the shift towards digital and touch-free payments by two to three years.
‘As consumers have adapted their shopping habits to meet social distancing restrictions, we’ve seen a huge number of traditionally physical businesses embrace digital and contactless payment methods.’
Some 10 per cent of UK consumers surveyed by market research firm Forrester said they’d used a smartphone to make an in store payment for the first time during the pandemic.
Chinese president Xi Jinping speaking in Shenzhen on 14 October. The city in southern China was marked as a special economic zone 40 years ago
But usage in China is already far more widespread, and the country leads the world in smartphone payments.
A report earlier this year by Worldpay found 48 per cent of physical payments, twice the proportion made globally, were made using eWallets, while 71 per cent of online payments were made this way.
Their massively increased popularity over the past decade is largely thanks to two major private companies, Ant, which operates Alipay, and Tencent, which operates WeChat Pay.
Alipay had 1.2billion users and handled ¥106trillion, or £12trillion in payments last year, while the two together had close to 2billion users in 2018.
In China’s largest cities, more than 90 per cent of people use the two apps as their main way of paying, while they are also used to send money to others.
Mobile payments have become so dominant in fact that the country’s central bank was forced two years’ ago to tell shops that it was illegal for them to reject the use of cash.
Last week’s giveaway took place in the Luohu district on the north eastern side of the city. The decision to hold the one-week trial in the city is likely due to its status as China’s tech hub. It is home to some of China’s biggest technology companies including Huawei and Tencent
Could our pound go digital?
While contactless and smartphone payments are increasingly common in the UK since Apple Pay arrived on these shores half a decade ago, the government at the moment is currently more concerned about physical cash disappearing than digitalising.
But consumer behaviour continues to evolve, with the pandemic meaning existing trends of more digital payments and fewer physical ones have only sped up, for better and for worse.
Worldpay estimated that by 2023 over a third of online payments will be made using digital wallets, while PayPal said there had also been a growing interest ‘in new technology’.
Apple Pay arrived in the UK in 2015. Last year 18% of adults were registered to use mobile contactless payments, four-fifths of whom used them to make a payment
These include the method that is so popular in China, with the company having introduced the ability to pay by scanning a QR code using its app.
‘While cash remains critical for many shoppers, the increasing ubiquity of contactless and digital payment options on the British high street will lead to widespread adoption that will last throughout the pandemic and beyond,’ it told This is Money.
And even a digital pound cannot be ruled out. In March the Bank of England launched a discussion paper on a ‘Central Bank Digital Currency’, which could effectively digitalise UK banknotes and could ‘allow households and businesses to make fast, efficient and reliable payments’.
The involvement of the likes of the Bank of England would make them different from cryptocurrencies like bitcoin, which are not run by any central authority.
Bank of England governor Andrew Bailey said so-called digital banknotes ‘may offer great opportunities and profound questions’. The Bank is looking into their use
The Bank, along with six other central banks including the European Central Bank and US Federal Reserve, revisited the subject a fortnight ago.
The group of six, along with the Bank of International Settlements, gave no indication as to whether a Central Bank Digital Currency should be launched, but said any system must co-exist with cash and other types of money, do no harm to monetary and financial stability and promote innovation and efficiency.
Governor Andrew Bailey said of the report: ‘CBDCs may offer great opportunities, but they also raise profound questions about the shape of the financial system and the role of the central bank.’
A recent study by 6 central banks and the Bank of International Settlements found any digital currency must be as easy to use as other payment methods and have a low cost
Worldpay’s Shane Happach called the announcement ‘interesting’ but said ‘the majority of UK consumers are not yet in a place where we will see immediate large scale usage of digital currencies’.
He added: ‘There needs to be a marriage of trust and opportunity for technology to see mass acceptance. The Bank of England may provide the former, it will be exciting to see what the use case that drives adoption will be.’