Commentary
One of the key aspects of the Chinese Communist Party (CCP) is that it must always project confidence, control, and power. But when it comes to its huge, digital currency-based underground economy, it could be striking out on all three.
China’s carefully planned economy operates under a cashless techno-state, where every yuan is tracked, every transaction monitored, and every citizen controlled at the swipe of a QR code. Yet beneath this frictionless surveillance facade, a massive structural rift is opening up.
The New ‘Flying Money’ Paradigm
To understand why Beijing could be struggling, one must understand that underground economies no longer run on briefcases full of cash. In China, the illicit gray market operates almost entirely in the digital sphere.
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In a traditional feiqian trade, no physical cash ever crosses a border. A wealthy citizen in Shanghai hands over onshore yuan to an underground broker via domestic bank transfers, digital wallets, or local accounts. Simultaneously, a partner network in Hong Kong, Vancouver, or London deposits the equivalent value in U.S. dollars, foreign currency, or cryptocurrency into an offshore account owned by the client.
Because these parallel transactions match domestic assets with foreign funds, the actual capital movements leave zero footprint on China’s official foreign exchange reserves. However, according to international financial intelligence and U.S. Treasury estimates, more than $250 billion in illicit outflows left China via informal networks in the last four quarters alone.
Therefore, millions of citizens, business owners, and criminals can move their wealth out of the country. When tens of millions of citizens decide to quietly move their savings into dollar-denominated assets or crypto, no firewall is thick enough to catch every trade.
How prevalent is the flying money paradigm?
A Hyper-Digitalized Domestic Currency Trap
Beijing spent the last decade celebrating the total elimination of cash, becoming the most cashless society on Earth, with mobile payment rails accounting for roughly 90 percent of point-of-sale retail activity.
Labels for digital payments (from top): VISA, WeChat Pay, and Alipay are displayed outside a boutique at a shopping mall in Hong Kong, China, on July 31, 2018. Reuters/Bobby Yip
From high-end boutique stores to street-level vendors, unregistered delivery drivers, and informal market stalls, the domestic shadow and gig economy embraced QR-code digital payments. Banknotes became obsolete relics.
However, this hyper-digitalization created two critical vulnerabilities for the CCP.
On the one hand, it resulted in systemic exclusion, wherein millions of elderly citizens, rural laborers, and foreign visitors have found themselves locked out of basic economic life in China.
China has been touted as leading the way with digital currency, and now finds itself struggling to control it, with hundreds of billions of yuan leaving the country without a trace.
What’s the CCP’s answer to this debacle?
The Illusion of ‘Re-cashback’ Regulations
Faced with this digital trap, the PBOC, alongside national regulatory bodies, enacted mandatory “regulations on cash receipt and payment services in yuan,” forcing physical merchants, public service providers, and businesses to accept physical banknotes or face heavy administrative penalties.
By forcing cash back into circulation, the central authorities are attempting to preserve the physical currency’s status as legal tender against total digital abandonment. Furthermore, Beijing wants to re-establish a floor for physical liquidity.
When the population relies 100 percent on digital channels, any loss of public confidence in the banking system can spark an instant, viral digital run on banks—where capital moves out of local institutions at lightspeed before regulators can intervene.
The Threat to Economic Stability
The contradiction at the heart of China’s economy is now glaring.
This dynamic threatens China’s economic stability in several ways.
For instance, the high demand for foreign currencies in the feiqian channels puts downward pressure on the yuan in China itself. That widens the gap between the highly managed onshore rate and the offshore international rate. This is forcing the PBOC to burn through resources to stabilize the yuan.
The inability to control capital flight out of the country threatens Beijing’s ability to tap domestic wealth to fund state-backed investments. In short, the CCP’s capital controls have become less effective as large sums of money are leaving China through digital channels.
The lesson the CCP is learning is stark. No authoritarian mandate can force confidence back into an economy when the underlying fundamentals are broken. The Party can mandate that a street vendor accept a paper 20-yuan note, but it cannot compel its citizens to keep their life savings trapped in a declining economy.
As long as domestic growth stalls and property values decline, China’s digital “flying money” will keep soaring past Beijing’s financial controls.
Views expressed in this article are opinions of the author and do not necessarily reflect the views of The Epoch Times.
