China moves towards greater control over fintechs

Regulation of P2P lending and greater scrutiny of Ant Group only the beginning

President Xi Jinping has repeatedly called on finance to serve the real economy, most emphatically at China’s 2017 national financial work conference. How to do this, though, has not yet been figured out. The most straightforward way is for finance to follow up passively on plans for the real economy, a centrally planned model that China is embracing. Such a model would certainly help prevent and dissolve financial risk.

But China has also been experimenting with market financing and private innovation, most notably in the fintech sector. The result of this was increased stock market volatility, fraud, massive profits and colossal losses.

In 2020, regulators embarked on an overhaul of internet finance platforms, encompassing asset management, insurance, cryptocurrency and foreign exchange trading. This included major moves, such as the closure of all peer-to-peer lending platforms and scrutiny of Ant Group, the owner of Alipay, eventually leading to the cancellation of its initial public offering. Payment systems Alipay and WeChat Pay have gradually been restricted, most notably with a 100% deposit requirement introduced in 2019.

Any time now, China’s last P2P platform will disappear, regulated out of existence. These platforms were initially celebrated as a technological and financial innovation, allowing millions of small savers to invest and millions of small- and medium-sized enterprises to borrow small amounts of money.

They numbered around 10,000 in 2015, decreasing to only 600 four years later and now vanishing altogether. These platforms filled a vacuum left by the established big banks. Their demise will be missed by SMEs which have been badly hit by Covid-19, though government measures have partly alleviated this.

These platforms excelled in credit risk assessment by collecting large amounts of data and had very low costs. But there was a design fault. Platforms gave investors the impression that they were depositing money with them. Widespread fraud didn’t help either. Essentially, they managed to collect deposits without proper supervision.

Access to deposits was also at the core of the investigation into Ant’s business model. China’s big banks regard such access as their privilege and called on the supervisory authorities to push out any intruders. They labelled what the fintechs were doing illegal fund raising activity, which needed to be cleaned up. Established banks wanted to play on a level playing field with fintechs.

The concerns of the these banks were expressed by the chairman of the China Banking and Insurance Regulatory Commission, Guo Shuqing, who also serves as the chief representative of the Communist Party of China at the People’s Bank of China.

At the 2020 Singapore fintech festival, he reiterated the authorities’ positive and prudent approach to fintech companies, similar to Deng Xiaoping’s famous ‘feeling the stones while crossing the river’. However, the big fintechs, first and foremost Ant Group, failed to satisfy regulators in a number of ways. Their business model was described as a cross-industry platform, which allowed the provision of various financial services, posing unfair competition. In addition, they grew too big to fail, stored data they collect insecurely and posed cybersecurity risks.

Alipay and WeChat Pay have been challenged by the introduction of the central bank’s digital currency/electronic payment system. The two juggernauts have been allowed into the DC/EP trial phase through their banks, MYBank and WeBank. However, the upcoming widespread rollout of DC/EP creates an uncertain future.

Fintech companies have pioneered digital products that are used by large swathes of the population. They might see their role reduced, from trailblazers to mere research labs for central authorities. The December 2020 central economic work conference, a meeting in China that helps set the agenda for its banking and financial sectors, spelled this out, when it called for ‘fully employing the role of the state as major science and technology innovation organisation’. Clipping the wings of big fintech companies and putting the state in charge might be an important step towards central control of the financial sector.

Herbert Poenisch is Senior Research Fellow at Zhejiang University’s Academy for Internet Finance and former Senior Economist at the Bank for International Settlements.

Join Today

Connect with our membership team

Scroll to Top