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127 Experimental Testing of China Blockchain

The  origins of a Blockchain approach to the organization of China finance is over five years old. In May 2017 the People's Bank of China, with other principal banks, issued a policy that defined the financial requirements how an integrated computer network could support all Chinese enterprises. In October 2017 the China State Council, the highest political authority in China, released the a directive how a network should support the financing of the entire national supply chain. In December 2017 the Shanghai and Shenzhen stock exchanges issued standards for receivables, including a standard for invoicing. In January 2018 the Ministry of Commerce, jointly with all related agencies, issued a directives how to expand the 13th Five-Year Plan to include a national supply chain finance system.

Exploratory blockchain projects were then launched to validate the feasibility of implementation. Tencent is the largest Chinese internet network operator with over a billion customers then proceeded with a test, which is currently ongoing. This blog will concentrate on Tencent, though other options may emerge in the future. 

Why China needs a national Supply Chain system?
The existing business processes are inefficient. The transaction costs, e.g. the sales, administrative and clerical costs, represent high overhead expenses. If capital is involved, that will suffer from a low turnover.  Transaction cost will asl incur high costs of receivables and inventories. The fractured Chinese supply chain, with tens of millions daily intermediaries, is now vulnerable to fraud and corruption.

The Tencent Approach(1)
Tencent proposes to links the transactions with assets and capital components. The purpose is to reduce overhead and financing costs in order to create a national integrated system based on real-time transactions which will be based on blockchain software.

The value chain assets will include documents such as receivables, warehouse receipts and e-trade invoices. The capital components will integrate assets such as bank, trust, fund, securities as well as all interbank trading. The processing capacity of such a system would include the handling of small and micro enterprises. The new networks will ultimately support local financing for a globally diversified economy.

The current objective of Tencent is to test blockchain applications under experimental controls to validate a wide range of capability and capacity options. At present Tencent is proposing a multi-layered approach that will be ultimately offered as as cloud-offered service, Blockchain-as-a-Service (BaaS), to an unlimited number of multinational enterprises at a low cost.

CAICT Trusted Blockchain Standards
The imposition of systems requirements on data, such as invoices, receipts or delivery tickets has been accepted by Tencent. That also calls for standardization of consensus management, of contract formats, security and legal processes that would safeguard against theft and fraud. Such steandardization can be accomplished only with a mandate from the central government and courts. Here is the current status of blockchain-related standardization efforts:

CAICT is the China Academy of Information and Communications Technology. It is a scientific research institute directly under the Ministry of Industry and Information Technology (MIIT). CAICT provides support for the industry’s major strategies, plans, policies, standards, testing and certification, proving itself an important facilitator in the leapfrog development and innovation of China’s ICT industry(2).

Conversion of data, information systems and software to Internet will be the most ambitious information technology program ever conceived. The benefits in increased security and in the reduction of administrative costs will have to be balanced against a cautious approach progress to implementation. Therefore, progress will be slow and in will advance in evolutionary steps which may take more than a decade. 

The key to the installation of blockchain in China is the support received from a wide range of  government institutions that will have to cooperate at every step. Attempts to achieve such centralization of control over the entire value chain has never been attempted before. Only a planned and tightly controlled economy will be able to deliver a computer-supported social order as has been proposed. 



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