Online Consumerism Adds to China Resilience

Photo credit: iStockphoto/Freer Law

China’s experience during the COVID-19 pandemic is speeding up the transition to the consumer-focused digital economy, which will be the next big story in the country’s evolution.

This is the view of Yiping Huang, director of the Institute of Digital Finance at Peking University, as expressed in an online seminar this week.

Yiping, who is also a Member of the Monetary Policy Committee of the People’s Bank of China, said that the development began during another epidemic, the SARS outbreak in 2003 which saw the rise of e-commerce giants such as Alibaba. This momentum reached new highs during COVID-19.

“Businesses are responding to the changing dynamic and so online activity has become important as a macroeconomic stabilizer,” Yiping told the seminar organized by the Australian National University’s Crawford School of Public Policy.

Consumers were more aware of the advantages of “contactless” commerce during the pandemic. This would continue to drive “the fourth industrial revolution in an even more important way,” he added.

Financial inclusion accelerated

Already, around 30% of China’s retail sales were online and this would only increase.

“This is not just a new trend, it’s a revolution,” Yiping said.

China’s rapid adoption of mobile payments was also a key factor in this transition. It drove financial inclusion for many businesses and consumers without bank accounts.

“Nowadays nobody going out would carry any cash; a mobile phone would be sufficient, and they are extensively used,” Yiping said.

“This is making the biggest contribution to extend financial services to people who would not otherwise be covered by traditional services, such as people in remote areas and in the western region of China.

The trend has also brought so called “offline businesses” into the financial fold, as consumers were able to pay through a combination of QR codes and mobile phones.

These scan-to-pay transactions have grown 15 times in the past three years and reached USD 1.3 trillion in the fourth quarter of 2019.

Yiping said that there were close to 100 million of these businesses in China, and the changes in mobile payments had brought them closer into the official economy and helped drive their growth.

Optimizing the digital footprint

The other area where digital finance was making an enormous difference was in lending, and this has also been accelerated during the pandemic.

“Most of the bank branches have been closed during the lockdown,” said Yiping.

New internet banks such as Jack Ma’s MYbank created new systems and digital processes which made physical branches irrelevant but could also lend to many offline businesses.

Because of the infrastructure they had built, the “marginal cost of servicing additional customers is very low,” Yiping said.

These banks were also using the “digital footprint” of a person or business in its lending decisions, instead of the traditional credit score methodology. 

A digital footprint comprises social media data, e-commerce records, and information shared from other technology platforms.

“Banks only look at a financial history and rate your assets,” says Yiping.

“Now you can look at a digital footprint and assess that using machine learning models, and once you have a big platform, you can monitor the whole process from the loan application through to lending.”

MYBank, for example, uses its “310” model to extend loans to new consumers who previously would have had no opportunity to be bank customers.

“This means that a potential customer can fill in a form in three minutes and if you are approved, the funds are in your account in one second, all without any human intervention,” said Yiping.

Ready for recovery

This was changing the financial industry but also the wider economy in China, he said. It was key not only to the economy weathering the pandemic but powering its next phase of growth.

Over the last 40 years, Yiping said, China had created the two big global economic stories: the export of labor-intensive manufactured products and the huge demand for exports.

Now, as the digital economy grows, the new story is around the Chinese consumer.

“Even if economic growth slows and the savings rate goes down, personal income as a share of national income is rising and this is the most dynamic story, and the next global story,” Yiping said.

Photo credit: iStockphoto/Freer Law