China is seeking to topple the dollar from Asian reserves by adopting the digital yuan as the official currency in its trade partnerships in Asian markets.

The main driver of this currency are two applications, "Alipay" and "WeChat Pay", which are increasingly popular in Asia and around the world at a time when the United States is unable to find a mechanism to regulate these digital currencies until the moment and deals with them as a threat to the continuation of the status quo.

In one of his last acts as president, Donald Trump issued an executive order banning eight Chinese software applications, including Alipay, the largest mobile payment application in the world.

Increasingly, people in China and other countries conduct all kinds of transactions via both Alipay and WeChat Pay, another app banned under Trump's orders and used for everything from paying electricity bills to buying food from street vendors to shopping in high-end stores.

Trump's January 5 ban sought to address concerns that these popular Chinese apps would allow Beijing to access sensitive data on Americans, but China's emerging dominance in Fintech poses a more fundamental problem for the United States.

Washington cannot trust that the Chinese Communist Party will harness its growing influence in financial markets for the benefit of all.

It is likely that Beijing will use fintech to occupy an advanced position in global trade, enhance surveillance, and lay the groundwork for challenging the US dollar as the world's reserve currency.

Mobile payment apps in China began as fun and easy ways to send "red envelope" holiday gifts to family and friends in the Lunar New Year, but they quickly blossomed into a colossal industry.

Millions of Chinese consumers use digital payment technologies in everyday transactions.

The booming middle class in China has jumped off credit cards and moved directly to digital payments that now exceed $ 42 trillion annually in China, nearly 150 times the volume of US transactions on apps like PayPal and Venmo.

The rise of Chinese fintech companies threatens to strengthen the world's most ubiquitous surveillance state.

"Data exhaust" as it is called absorbs billions of digital transactions, complements existing data from facial recognition technologies, search dates, and social network connections, and provides the Chinese Communist Party with time and place data from global navigation systems, transaction history, travel records, bank account details, and more.

Taken together, this information enables Chinese authorities to closely monitor and control specific individuals and communities by reducing or canceling access to bank accounts, blocking travel routes, and denying entry to specific locations.

Unfortunately, Hong Kong financial authorities have recently begun requiring banks to report transactions to help authorities identify pro-democracy activists.

Officials outside China are understandably worried about how the Chinese authorities are harnessing the data produced by users in their own countries. Alipay is proud of its users in more than 110 countries.

Indian Member of Parliament Narendra Jadhav warned in 2018 that if Chinese fintech companies gained access to the financial data of millions of Indians and Indian companies, this would expose India to "serious geopolitical risks".

Similar concerns prompted Trump's executive order in January to ban Alipay, WeChat Pay, and other Chinese software apps.

But China's dominance in fintech also promises to boost the expansionist ambitions of the Chinese Communist Party in another way that connects other countries to the Chinese economy.

Chinese financial technology companies operate like an economic geographic Trojan horse.

First, Alipay and WeChat Pay, the companies that make up 95% of the mobile payments market in China itself, integrate into the daily economic life of another country.

Then, by leveraging this financial infrastructure, these companies and other Chinese companies obtain digital banking licenses, and rapidly expand them in other sectors such as digital insurance, consumer credit, remittances and lending.

Soon these companies will merge into the host country, so that they cannot be removed.

For example, in early December, three of the four winners chosen from a group of 21 who applied for digital banking licenses in Singapore were Chinese or were strongly supported by Chinese investors.

American companies and other Western companies were nowhere near that, leaving China in an open field for play.

China's attempt to dominate financial technology in Asia is a step toward the larger goal of achieving global reserve currency dominance.

Last fall, analysts at the US financial services company Morgan Stanley predicted that the Chinese yuan could overtake the Japanese yen and the British pound and become the world's third largest reserve currency by 2030, representing between 5% and 10% of global foreign exchange reserve assets.

Beijing is challenging the influence of the US dollar in Southeast Asia and parts of Africa, as next year it likely prepares to launch a sovereign digital yuan that will make transactions easier and also enable China to better track how its currency is used.

Consumers and merchants across Southeast Asia will soon be able to access the digital yuan via Alipay and WeChat Pay.

Later, the apps will act as a distributor for the digital yuan, as local companies find that using the yuan is more efficient than the dollar in transactions with Chinese companies.

The Chinese Communist Party could then push corporations and corporations that conduct massive transactions such as making interest payments and financing supply chains to use the digital yuan instead of the US dollar.

This transformation has already begun even before the introduction of China's new sovereign digital currency.

As bilateral trade between China and Southeast Asian countries has grown in recent decades, so has the share of trade in the Chinese yuan, eroding the share of the US dollar in bilateral trade.

Dino Dajal, a former Indonesian ambassador to the United States, noted that Indonesia's bilateral trade with China in 2019 amounted to $ 79.4 billion, a ten-fold increase from 2000, making the yuan's "more attractive" use for Indonesian companies when dealing with Chinese companies.

The yuan's share in bilateral trade between China and Indonesia has quadrupled in the past four years.

Countries in the region may soon start increasing the yuan's share of their foreign exchange reserves.

Perhaps the Russian example foreshadows the future of Southeast Asia in this regard.

Russia greatly increased the share of the yuan in its reserves from more than 2% in 2018 to more than 14% in 2019, and also reduced its share of the US dollar from about 30% to about 10% during the same period, and the share of the dollar in trade settlements between China and Russia decreased. From 90% to 46% since 2016.

The Chinese digital yuan could pull transactions away from Western-dominated exchange platforms such as "SWIFT", the main mechanism that maintains the dominance of the US dollar in global trade.

Chinese Communist Party officials described the "SWIFT" system as a way for the United States to maintain "global dominance" and reap "huge profits thanks to the monopoly platform".

US officials should take Chinese moves in this area very seriously.

Max Levchin, one of the founders of PayPal, believes that if the United States does not act collectively and make a digital copy of the dollar more readily available, "we risk letting China become the world's digital reserve currency."

The United States will lose influence and influence over many countries if it chooses to use the yuan over the dollar increasingly.

The United States should be serious about providing alternatives to other countries for Chinese fintech companies, and taking advantage of the power of American technology companies.

However, these companies have been slow to engage themselves in the increasing competition with China.

Alibaba or Tencent has invested in each of the 13 Unicorn Technology companies, a startup valued at $ 1 billion or more, in Southeast Asia.

By contrast, Facebook and PayPal invested in Southeast Asia's first fintech player, Gojek, just last March.

American companies such as Facebook, Google and PayPal should not exit from the world's most important growth markets, which are predominantly located in the Indo-Pacific region.

Meanwhile, the US government needs to find ways to encourage its tech giants to partner with non-Chinese fintech companies around the world.

It should also incentivize large US venture capitalists to invest in ways that serve national interests, just as China does.

Ultimately, the United States needs help in providing countries with an alternative to China's technological dependency.

"Gojek"

The common and convenient digital commercial payment systems that Chinese consumers use daily are an important part of China's technology-driven authoritarian surveillance state, which we call the "Chinese operating system".

Through financial technology, China is intent on demanding a greater stake in the global economy and gaining greater control over the global financial system.

The United States still has time to win this competition, but failure to act sooner will force it to play a tough catch-up game.

——————————————————————————————————–

This article is translated from Foreign Affairs and does not necessarily feature Maidan.