Is China a Cashless Society? A Look at the Digital Economy

China has undergone a rapid transformation in its payment landscape, leading many to perceive it as a society that has largely moved beyond physical currency. This shift towards digital transactions has reshaped daily commerce and financial interactions across the country. The prevailing view suggests that cash has become an infrequent sight, raising questions about the extent to which China genuinely operates as a “cashless society.”

The Dominance of Digital Payments

Digital payment platforms have achieved widespread adoption in China, altering how transactions occur. Alipay and WeChat Pay stand as the primary mobile payment solutions, dominating the market. As of February 2024, Alipay reported approximately 660 million monthly active users in China, with its global user base exceeding 1.3 billion. WeChat Pay had 935 million active users in 2023. These two platforms together account for over 90% of the mobile payments market in China.

In the third quarter of 2023, Alipay alone processed 118.19 trillion yuan in transactions, while WeChat Pay handled 67.81 trillion yuan. Overall, mobile payment transactions in China reached an estimated 526.8 trillion yuan, or approximately $74 trillion, in 2023. This widespread usage translates to a high penetration rate, with digital wallets adopted by nearly 88% of the Chinese population. The country also records a mobile payment penetration rate of 38.3%.

How Digital Payments Operate

Digital payments in China primarily use QR codes for transactions. Consumers can either scan a merchant’s displayed QR code, commonly found at checkout counters or on product displays, or present their own QR code for the merchant to scan. This system facilitates payments for a wide array of goods and services.

Digital payment applications offer functionalities that extend beyond simple purchases, encompassing public transport fares, utility bill payments, and even transactions with small vendors. Users link their bank cards to their mobile wallets within these applications, and some platforms also employ biometric data, such as facial or fingerprint recognition, for transaction verification. For international visitors, some platforms now allow linking international credit cards.

Factors Driving Digital Payment Adoption

Several factors contributed to the rapid adoption of digital payments in China. A significant element is the high mobile phone penetration across the population, providing a broad user base ready for mobile-centric financial services. This technological readiness coincided with the rapid expansion of e-commerce, which saw its market value reach approximately $2.22 trillion in 2023, with 884 million online shoppers. The growth of e-commerce fostered an environment where digital transactions became a necessity for online commerce.

The convenience and efficiency offered by digital platforms were also key to their adoption. Unlike some other economies with established credit card infrastructures, China had a less developed traditional banking card system. This allowed mobile payment solutions to bypass conventional payment methods, becoming the dominant form of transaction without facing entrenched competition from credit cards.

The Continued Role of Cash

Despite the pervasive nature of digital payments, cash still plays a role within China’s economy, though its use has diminished. Certain demographics, such as older generations, and specific settings, like rural areas, still see more frequent cash transactions. Small local markets, street vendors, and some taxi services may also prefer or require cash payments. Refusing to accept cash as a form of payment is illegal.

Authorities ensure cash acceptance for financial inclusivity, issuing directives to encourage retailers and hospitality venues to accept cash. While digital payments are overwhelmingly common in major urban centers, some individuals in smaller towns and villages still rely on cash. This indicates that China is not entirely cash-free, and cash remains a valid payment option.

The Digital Yuan’s Emergence

A distinct development in China’s payment landscape is the emergence of the Digital Yuan, also known as the e-CNY, which is a central bank digital currency (CBDC). The e-CNY is a digital version of China’s fiat currency, the renminbi, issued and controlled by the People’s Bank of China (PBOC). It holds legal tender status and is pegged 1:1 with the physical yuan, and operates without interest.

The e-CNY differs from commercial digital payment platforms like Alipay and WeChat Pay in its fundamental nature and operational structure. Unlike the commercial platforms, which are operated by private technology companies, the e-CNY is a direct liability of the central bank. It functions on a two-tier system where the PBOC issues the digital currency to authorized commercial banks, which then distribute it. While commercial platforms offer broad transaction data to tech companies, the e-CNY aims for “managed anonymity,” providing anonymity for small transactions while retaining traceability for larger or suspicious ones to prevent illicit activities.

The underlying technology of the e-CNY is not solely based on blockchain; instead, it utilizes a mix of technologies, including digital certificate systems, digital signatures, and alliance chains for security and efficiency. Development and piloting began in 2019, with trials expanding to 29 cities across 17 provinces. By June 2024, its total transaction volume surged to 7 trillion e-CNY. The digital yuan has been integrated into various daily use cases, including public transit and popular online platforms, and was notably featured during the 2022 Winter Olympics. The PBOC’s stated objectives for the e-CNY include diversifying payment methods, improving payment system efficiency, enhancing financial inclusion, and providing a resilient backup to the existing retail payment system.