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.