An Introduction to Virtual Currency in China

Posted by Joel

After a long week of overtime with my eyes glued to the computer screen, I needed some time away from the monitor. On Saturday morning I walked from my apartment to the newspaper stand down the street and picked up a copy of the only print Chinese publication I read on a regular basis, Caijing magazine, an extremely well-done Chinese business and economics publication (if you are interested in reading the English version check out their site here). At the stand, I looked in front of me to see a teenager buy a pocket-sized object that was not a periodical. When I asked the stand owner what the boy bought, he replied: Qbi. He then showed the Qbi he had available for sale in 6, 10 and 30 RMB denomination bundles. I returned home with my copy of Caijing determined to find out more about Qbi and what it is used for.

What is virtual currency?
After a Google search I quickly discovered that Qbi (aka Q Coin) is a type of Chinese virtual currency created by Tencent Holdings. Virtual currency is used online, usually for entertainment purposes, either in virtual economies within virtual worlds or other online services that seek to engage users through virtual economic means (see post “Virtual Currency Leads To Real World Ad Revenue For This Chinese Web Company”).

How is virtual currency used in China?
Most major Chinese web portals have their own form of virtual currency. Qbi is by far one of the most popular since it can be used with Tencents extremely successful online products QQ, Chinas market leader in instant messaging and QQ Zone, Chinas most popular social network with nearly 342 million users nationwide. For example Qbi can be used to personalize users QQ avatars that appear during instant message conversations. Qbi can also be used to play online games, purchase greeting cards as well as a host of other online products. Users can buy Qbi at newspaper stands like the one I visited, or with special bank cards and telephone cards. They can also accumulate it by playing games online. One Qbi is the equivalent of one RMB, but when the virtual currency is bundled in packs of 6, 10 or 30, then the virtual currency is not as inexpensive as one might initially believe.

Baidus virtual currency enables users to watch full-length movies online and download music. Sinas U coin can even be used to purchase real world items from the Sina online mall. For a more in-depth breakdown on how virtual currency is used in China check out this great article by Shaun Rein.

Where does the Chinese government stand?
The Chinese government is not supportive of virtual currency usage. Last year it restricted the conversion of virtual currency back into RMB out of fear that it could destabilize the RMB and provide a potential channel for money laundering. More recently, at the end of October, the State Administration of Taxation announced a 20% personal income tax on profit related to virtual currency.

The Observers Thoughts
Internet companies have definitely found virtual currency to be an effective way to engage users, but I feel that no one yet fully understands the implications of virtual economies on real economies. The Qbi has yet to destabilize the RMB, but virtual currency has led to real world criminal behavior. On an individual level, incidents of hackers emptying users virtual accounts is on the rise. Tencent has even been suspected of manipulating Qbi to influence its stock price (see this excellent post by Kaiser Kuo in China Digital Watch). I feel that as long as virtual currency can be purchased with real money, there will always be an incentive for individuals to utilize the system for illicit purposes. With Chinas virtual currency market growing between 15-20% and several billion RMB traded in the marketplace, this is certainly an area of Chinas online space worth observing.