Virtual currency threatens stability of Chinese currency

Kaiser Kuo brings us the fascinating and deeply weird story of the QQ, a virtual currency from a Chinese social software company that turned into a real-world currency that threatens to destabilize the national currency of China:

The QQ coin is in the news again. This morning a friend sent me a link to a story on Donews (in Chinese, originally apparently from a publication called “Online International”) that goes into quite a lengthy exploration of the origins of the QQ coin, conceived in part to help ween Tencent off the addiction to wireless revenues it shared with other leading Chinese Internet companies. The story looks at how Tencent partnered with banks to pioneer a debit card-based payment system (debit cards, unlike credit cards, enjoy very high penetration), and how the company exploited game card distribution channels — amassing some 3,655 points registered outlets in Beijing alone where QQ addicts can get their fix, including post offices, news kiosks, software stores, Internet cafes, malls, convenience stores, and so on. There’s quite a bit of fascinating detail on channel costs, the margins of card resellers, and of course the balance that goes into Tencent’s pockets.
But the story purports to reveal some of the darker secrets of how Tencent keeps its users buying QQ coins — especially if the company doesn’t look like it’ll hit its quarterly numbers. (The article’s title, in my rough rendering, is “All Services Are Commodities: Exposing the Extortionate Secrets of the QQ Coin”). As promised, this time around the meat of the story centers on allegations that Tencent is manipulating its virtual currency so as to impact not the RMB, but rather its stock price. (The company is listed on the HKSE, ticker symbol 0700). The story quotes a former product manager for Tencent’s virtual pet offering, QQ Pets, named Gao Shan.

Link (Thanks, Kaiser!)

Discussion

Take a look at this

#1 posted by Jeffrey McManus

, June 19, 2008 8:36 AM

A company is trying to sell more of something so it hits its quarterly sales targets? Shocking.

#2 posted by zuzu

, June 19, 2008 10:19 AM

Denationalization of Money: An Analysis of the Theory and Practice of Concurrent Currencies by Friedrich A. Hayek

This will be an important lesson to learn as United States dollar inflation unwinds from its non-neutral position into the general economy (e.g. higher prices on commodities, such as gasoline); just as Argentina did.

c.f.:
* Complementary currency
* Currency competition
* Electronic money / Financial Cryptography
* Virtual economy

and then remember what Richard Florida said about the Rise of the Mega-Region:

When people talk about economic competitiveness, the focus tends to be on nation states. In the 1980s, many were obsessed with the rise of Japan. Today, our gaze has shifted to the phenomenal growth of Brazil, Russia, India and China. But this focus on nations is off the mark.

The real driving force of the world economy is a new and incredibly
powerful economic unit: the mega-region.

Extending far beyond a single core city and its surrounding suburbs, a
mega-region is an area that hosts business and economic activity on a massive scale, generating a large share of the world's economic activity and an even larger share of its scientific discoveries and technological innovations.

While there are 191 nations in the world, just 40 significant
mega-regions power the global economy. Home to more than one-fifth of the world's population, these 40 megas account for two-thirds of global economic output and more than 85% of all global innovation.

#3 posted by zuzu

, June 19, 2008 10:37 AM

This will be an important lesson to learn as United States dollar inflation unwinds from its non-neutral position into the general economy

Not to mention that inflation of the USD (thanks to a 6-year and counting war, with no war bonds sold or war tax raised), is shifting the role of the USD as a reserve currency -- which for the past several decades created artificial demand for the USD fiat currency (to include in other fiat currency baskets).

So those of us with holdings of United States Dollars not only have inflation from the war to worry about, but added unwinding inflation from the other nations of the world dumping their reserves of USD to shore up their own currencies.

#4 posted by Mindpowered

, June 19, 2008 11:00 AM

Humans will ascribe value to anything, as long as they can get a return on it.

The QQ coin has value because someone somewhere will give something of real value for it (in this case yuan). Likewise linden dollars at one point must be converted back into US dollars to have any value. Not to say a whole series of transactions won't have taken place before it is converted back.

The difference of course is compliance. Linden dollars only have the backing of Linden Labs and their very limited powers of compliance. US dollars have the backing of the US government behind them and the threat of forced compliance if you fail to receive what is legally fair market value. This is why we have fraud trials.

Gold ultimately has the same relevance as linden dollars.

#5 posted by zuzu

, June 19, 2008 11:12 AM

i.e. marginal utility

Gold ultimately has the same relevance as linden dollars.

Except that gold is a physical commodity, while dollars issued by Linden or the Federal Reserve are fiat currencies. The supply of money can be manipulated by Linden or the United States respectively, but gold is effectively fixed in quantity.

Hayek's argument is interesting in that it rests on the premise of using competition to curb the inflation otherwise encouraged in monopoly fiat currency zones.

#6 posted by Mindpowered

, June 19, 2008 3:46 PM

Scarce or not gold only has value inasmuch as it is a convertible into US dollars (or the currency of your choice). The fact that it is ultimately limited does not detract from it's arbitrary assigned value as opposed to platinum which has a host of industrial uses. (yet if a substitute for platinum was found for catalytic converters, the demand would collapse)

Moreover it is the fact that the US dollar has the apparatus of the US government behind it that is important.

Hayek's method of inflation control breaks down when there is a commodity competition as is going on currently. Any savings the consumers get on the comparative advantage of finished goods and services from China and India is nullified by the rising price of basic commodities.

#7 posted by zuzu

, June 19, 2008 10:38 PM

Scarce or not gold only has value inasmuch as it is a convertible into US dollars (or the currency of your choice). The fact that it is ultimately limited does not detract from it's arbitrary assigned value as opposed to platinum which has a host of industrial uses.

I think maybe you're overlooking the use of precious metals as a medium of exchange (i.e. money), largely due to its inherent scarcity on Earth (and its durability).

Only if you're worried about paying US taxes. Otherwise I'd consider this a risk (i.e. war debt / inflationary pressures).

I don't follow what you're saying here. Inflation control has to do with competition allowing people to exchange private fiat currencies according to perceived risk of inflation. Purchasing power is determined inversely to expansion of the supply of currency. I don't see where supply/demand of finished goods or commodities enters into it, as you've described.