China’s FinTech industry is incomparable to the rest of the world. It is home to eight of the world’s leading FinTech unicorns, with an average value of $26.8BN – eight times greater than the average value of North American FinTech unicorns.
But, behind China’s rapid FinTech development lies a country with unique circumstances, consisting of a large, tech-savvy population, and an open regulatory environment. The unique landscape is only reinforced by China’s dedication to its tech giants – Baidu, Alibaba, and Tencent, who have never had restrictions imposed on their growth.
Currently, there is no single regulatory body responsible for the regulation of FinTech products and services. Instead, different FinTech services and products are regulated by different regulatory bodies and there is a requirement to bring order to the rapidly expanding industry. The People’s Bank of China recognise this and have commented that the FinTech industry either lacks the standards or needs to update the existing standards, which the majority of Chinese authorities agree with. This suggests there is consensus that the current regulations for FinTech are not clear or robust enough to drive high-quality developments in the industry.
Arguably, the need for increased regulatory frameworks and oversight was first identified by various fraud cases, including the EZubao peer-to-peer (P2P) lending scheme, a Ponzi scheme, to which almost 1M fell victim too – it was subsequently closed in 2016. The P2P lending industry in China has experienced a lot of turbulence since then. This was without a doubt a turning point for Chinese policymakers to start forming tighter regulations.
Since then, we have seen progress towards increased regulation:
- 2016: The Chinese government laid out a comprehensive framework for regulating the internet finance industry across different verticals, like lending, insurance, crowdfunding, payments, fund distribution, and consumer finance
- March 2017: China’s central bank established a centralised clearinghouse (Wanglian) for all third-party payments, enabling regulatory oversight on fund flows
- May 2017: The Central bank set up a FinTech committee to act as the overall coordinator of all FinTech efforts and policies
More recently China’s mission to regulate FinTech has become more evident, given its three-year development plan, with a vision to build a fundamental policy framework by 2021 that will tackle the outdated regulatory status quo. More specifically, the plan aims to improve the quality of financial services, strengthen regulation for technology-driven innovations, and prevent systemic financial risks. Ultimately, the goal is a system of basic regulations for FinTech supervision and the creation of inclusive and vigilant regulatory tools for boosting technological innovation.
China is also preparing to introduce 17 standards for FinTech categories, including blockchain, artificial intelligence and cloud services. The introduction of the new standards aims to fill shortcomings in key areas, with a particular focus on data security. China currently has 65 national financial standards and 252 financial industry standards, which include mobile financial payment client technical specifications, voiceprint identification and more.
Another sign of regulatory change is the announcement at the end of 2019 that Beijing will be the national financial regulatory centre, potentially making Beijing the nation’s hub for tech innovation and regulatory trials. This plan also includes regulatory sandboxes for 10 major cities including Shanghai and Shenzhen.
Interestingly, earlier this month it was announced that Chinese regulators are close to creating a set of rules which would allow existing foreign companies in China to set up separate China-based digital banks. Historically, foreign players have found it difficult to enter the highly developed Chinese market, so the news presents an opportunity for new entrants to shake up the landscape, even if China isn’t opening its doors completely.
China certainly seems to be taking steps towards a more inclusive and innovative landscape. Regulating such a dynamic and unique market will always leave some ambiguity about the impact of these increased regulations on different players within the market. While it is highly unlikely that China’s tech giant’s market share will be impacted by these, there will most certainly be more scope for smaller players to thrive while at the same time reducing risks associated with such fast and advanced technological developments. While a more comprehensive regulatory landscape is set to bring more structure to China, it is yet to been seen whether the market will ever look even remotely similar to its western counterparts.