By serving as middlemen to ensure that sellers get paid and
buyers get what they pay for, credit cards are an invaluable part
of modern economies, and most Chinese would be happy to have one.
But the process of obtaining a card is more onerous in China than
in the United States, so a novel sort of credit economy has arisen
on the Internet.
Tencent, China’s largest telecom provider, purveyor of the
popular QQ instant messaging service, offers a virtual currency
that allows Internet users to buy ringtones for cell phones,
weapons for online games and the like. The currency, called QQ
coins, can be easily exchanged on QQ, and Internet users can buy a
single QQ coin for a single yuan.
Until earlier this year, Chinese Internet users could use QQ
coins to buy goods and services from third-party vendors, which
were rapidly springing up to meet the demand, but the PRC
government cracked down on the practice. Like their counterparts in
other countries, Chinese netizens sometimes used the currency in
ways authorities didn’t approve of: to gamble, to buy pornography,
and perhaps later, some feared, to evade taxes, launder money, or
finance terrorist operations.
“Virtual currency has been a hotbed for gambling and illicit
trade under the guise of e-commerce,” Zhou Hongyu, a National
People’s Congress deputy from Hubei said in March, shortly before
the stricter regulations went into effect.
These fears are overblown. In regulating QQ coins and other
virtual currencies like them, the PRC may be smothering a new
wealth-creating enterprise in its cradle.
With additional measures to prevent fraud and abuse, the QQ coin
or something like it has the potential to allow China’s 137 million
Internet users to supplant slower channels of exchange for paying
bills, buying goods in online auctions, and the like.
Analysys, a Beijing market research firm, estimated in May that
60% of China’s Internet population had made an online payment of
some sort, and 8% make at least one such payment per month. The
value of these payments, the South China Morning Post
reports, totaled 50 billion yuan last year, and is expected to add
up to 150 billion yuan in 2009.
In the U.S., Internet users can make purchases in online
auctions on eBay, and transfer payment with intermediary services
like PayPal, but the practice requires various forms of
identification. In the age of identity theft, customers who would
otherwise shop in these auctions balk when they see systems that
require them to enter their automobile driver’s licenses and bank
account numbers.
Virtual currencies could make that simpler. Chinese Internet
users already use online payment systems like Alipay, a product of
the Huangzhou-based company Alibaba, in huge numbers. The system is
said to have more than 33 million registered users — almost a
quarter of China’s entire Internet user base — but it charges 1.5%
to third-party users for transferring money through it.
That’d probably be lower if there were more competition. If the
Chinese government were to regulate virtual currencies only as much
as was necessary to prevent egregious misuses, and go after
gambling sites, pornography peddlers and the like separately, it
would witness the rise of a whole new economy. Third-party vendors
of all sorts would sell their goods in exchange for virtual
currency so long as they could redeem it for RMB.
Insofar as Tencent gives initial QQ coin deposits to users on a
promotional basis, it has an incentive to prevent misuse of its
accounts. And insofar as customers pay for the rest of their QQ
hoards in real RMB, the customers themselves will take steps to
keep their accounts secure.
The growth implications are huge, and the monetary ones,
trivial. “These limited use currencies are pretty contained. They
don’t spill over into other transactions,” says George Selgin, an
economist at the University of Georgia, and a specialist in
e-money. “If they’re denominated in the Chinese yuan, then their
supply is strictly governed by the supply of [currency] the Bank of
China issues.”
And if people were using virtual currencies solely as a means of
concealing their transactions, they could just as easily use cash.
If the government were really committed to cracking down on all
undesirable behaviors, Selgin remarks, taking the example to the
extreme, it could just do away with paper money.
Of course, “In any such action, you’re going to suppress
legitimate trade along with some underground stuff,” Selgin adds.
“You might accomplish your goal, to some extent, but you’re doing
it at a heavy cost in legitimate activity.”
With millions of Chinese clamoring for easy access to credit,
that’s something for PRC planners to keep in mind.
David Donadio is a writer and editor at the Cato
Institute in Washington, D.C.
