Leading Chinese Think Tank Warns of Mobile Payments Impact on Monetary Policy


A new report from one of China’s leading financial and economic think tanks has outlined the potential impacts of the roaring growth of the mobile payments sector upon the Chinese central bank’s monetary policy.

“Since 2013, China’s mobile payments transaction scale has seen explosive growth,” said the report entitled “Will Mobile Payments Affect Monetary Policy Transmission?” (移动支付会影响货币政策传导吗?) by Zeng Gang (曾刚) and Luan Xi (栾稀) from the National Institution for Finance & Development (NIFD).

“From a long-term perspective, major changes to payments behaviour will inevitably have an extremely far-reaching impact upon monetary creation and monetary circulation mechanisms, thus fundamentally changing the monetary policy environment.”

The NIFD team reached several key conclusions about the impact of the proliferation of mobile payments upon China’s monetary supply:

  1. The impact of mobile payments on the money multiplier remains uncertain, and given dynamic changes to the money multiplier, it will be difficult for the Chinese central bank determine the base money supply needed to support a set expansion in credit;
  2. Mobile payments increase the velocity of money, further diminishing the relationship between the money supply and GDP, and impacting the effectiveness of quantitative monetary policy tools;
  3. The impact of mobile payments upon need for reserves amongst commercial banks could interfere with the liquidity operations of the Chinese central bank to guide money market rats;
  4. Mobile payments will expedite the growth of money market funds, and heightening interest rate sensitivity, which will be of benefit to driving the formation of transmission mechanisms for monetary policy.

Zeng and Yi write that central bank policymakers will need to focus on three key issues during “exploration of adjustment tools that correspond to the new payments environment, in order to maintain the effectiveness of monetary policy transmission:”

  1. How to respond to ongoing reductions in cash-usage;
  2. The ongoing disruption caused to central bank liquidity adjustments by the replacement of cash with electronic money; and
  3. The formation of new channels for the transmission of monetary policy.

“Mobile payments will firstly have an impact upon the structure and total production of base money,” write Zeng and Yi.

“Base money is equal to cash plus reserves…in theoretical terms mobile payments possess the advantages of greater convenience and low storage costs and can replace cash payments, causing a reduction in cash in circulation (MO) and thus leading to a change in the structure of base money.”

Zeng and Yi further point out that mobile payments are also likely to change the money multiplier in an uncertain manner, impacting the M2 money supply and quantitative monetary policy transmission.

“There is definite uncertainty with regard to the impact of mobile payments on the money multiplier as well as M2,” they write.

“Mobile payments will reduce the amount of cash in circulation, leading to a decline in the currency ratio (cash/reserves)…[which] increases the money multiplier.

“On the other hand, however, mobile payments make payment easier, accelerating the velocity of monetary circulation (broad money).

“According to the Fisher equation, when the total volume of transactions do not change yet the velocity of circulation accelerates, this leads to a decline in the quantity of money and thus a reduction in the money multiplier.”

The report claims that mobile payments could change commercial bank demand for excess reserves, and thus have a major impact on money market rates.

“Excess reserves are an index reflecting banking system liquidity, and the central bank influences banking system liquidity in order to impact money market rates.

“If excess reserve ratios are subject to exogenous impacts such as mobile payments, and this leads to changes in the demand for excess reserves, yet the central bank continues to observe matters in the manner to which its accustomed, this could cause biased assessments of the actual state of banking system liquidity, impacting liquidity injections by the central bank and exacerbating the volatility of money market rates.”

The NIFD researchers further point out that the close relationship between mobile payments and the growth of money market funds is poised to have a major impact upon interest rate channels, as evidenced by the emergence of Ant Financial’s Yu’e Bao as the world’s biggest money market fund.

“The emergence of Yu’e Bao in 2013 enabled users to invest the funds they’d accumulated in third party payments virtual accounts in current deposit money market funds that provide far higher returns.

“Despite the fact that at present money market funds have been stripped of their payments function, and online platforms are gradually being stripped of their third party payments settlement function, the model of money market funds + instant payments has accelerated the penetration of mobile payments, and ignited the fuse of ongoing growth in money market funds.

“The joint development of mobile payments and money market funds is of benefit to forming and clearing out interest rate channels.”