Banker's Digest

Banker's Digest


108.06台灣銀行家雜誌第114期 / By Matthew Fulco

Fintech with Chinese characteristicsChina has built a formidable fintech ecosystem by combining private-sector innovation with heavy-handed state intervention
China is among the world's top fintech hubs with its largest internet finance ecosystem. Led by internet giants Alibaba and Tencent, China has in less than a decade jettisoned its entrenched cash preference. About 75% of Chinese prefer digital payments to cash, according to the state-run China Daily. Only Sweden is ahead of China in the race to go cashless. In mobile banking, China leads the world with an 86% penetration rate, according to consultancy PwC. Chinese consumers can pay for almost any everyday transaction with their smartphones, either within an app or offline by swiping a QR code. They can also apply for a business loan, mortgage or invest in a wide variety of wealth-management products from the convenience of the WeChat or Alipay app. Beijing has embraced fintech out of necessity. Its dynamic private sector - which contributes more than 60% of China's US$12.24 trillion GDP - has long lacked access to credit. Traditional banks prefer lending to large state-owned firms, which they view as more reliable. The banks can be choosy about consumer borrowers too, especially given China's lack of a traditional credit system. The Chinese tech juggernauts worry less about risky borrowers because they have access to so much data from businesses and consumers. They're thus in a better position to assess the creditworthiness of a small company or an individual than a traditional bank. Demand for loans has remained robust in China even as the economy has slowed. The consumer lending business of Ant Financial - the finance arm of Alibaba - reached US$95 billion in March 2018, up 100% year-on-year. That's bigger than To be sure, Alibaba and Tencent have benefited from strong government support. That's not to discredit their fintech platforms, which are more advanced than anything commercially deployed in the world's richest countries, even if the core technology isn't new. But government support has helped ensure near universal adoption of their services. Compared to the U.S., Beijing gave its big tech firms much more space to experiment with internet finance. Google, Facebook and Amazon might have become digital banking juggernauts if they had had the opportunity. For better or worse, Washington kept big tech and big finance separate. In contrast, China let the online payments market grow for some time with minimal regulation. The People's Bank of China governor even "explicitly stated that he would allow unregulated tech firms to enter spaces that were previously off limits to anyone without a financial license, giving those companies freedom to grow before any rules would be imposed," notes the MIT Technology Review. Beijing let Alibaba and Tencent establish virtual banks in 2015, granting the tech giants banking licenses. Business has boomed for them. Data from Yicai show that as of October 2018, Alibaba's MyBank had accumulated 78.2 billion yuan in assets, had 446.8 billion yuan in loans on its books and posted a net profit of 404 million yuan. Its NPL ratio was just 1.23%. WeBank has done even better, accruing 81.7 billion yuan in assets, loans of 870 billion yuan, and posting a net profit of 1.5 billion yuan, with an NPL ratio of just 0.64%. P2P's rise and crash China's inviting tech giants into the banking sector was an unprecedented move, but it was a calculated one. On the one hand, Alibaba and Tencent meet market demand for SME and consumer lending that traditional banks cannot, while providing mostly frictionless digital banking platforms. China's financial sector today is more efficient, inclusive and competitive than before the tech giants got involved. At the same time, the tech giants are still incumbents. They may not be traditional banking incumbents, but they are large established public companies with deep pockets. They have close ties to decision makers in the ruling Chinese Communist Party. Indeed, if they didn't, they wouldn't be successful today. Beijing can trust such known entities to experiment in the financial sector when that experimentation serves the central government's policy objectives. The same does not hold true for fintech startups. Beijing still gives them space to experiment, but once something goes awry - which is inevitable in an unregulated finance segment - the government cracks down with tremendous force. Whoever survives the crackdown can declare victory, albeit a potentially Pyrrhic one. Consider the meteoric rise and plummet of China's P2P lending sector. Voracious demand for credit fueled P2P's ascendancy in China. It grew from virtually zero to $176 billion between 2012 and 2018. P2P loans have surely benefited some Chinese lenders and borrowers, but lack of regulatory oversight resulted in disaster. Hundreds of thousands of retail investors, not privy to the risk of loan defaults, have lost their life savings. Most infamously, now defunct online lender Ezubo defrauded 900,000 investors out of 50 billion yuan ($7.82 billion) in a massive Ponzi scheme. Some online lenders didn't defraud borrowers, they just charged them exorbitant interest rates. Once the borrowers defaulted, they sometimes faced threats of violence. "Essentially, many P2P [lenders] are doing similar things as loan sharks," Qian Zongxin, a Renmin university finance professor, told Germany's Deutsche Welle in February. In February, Tuandai, one of the largest P2P platforms (it had 220,000 lenders and borrowers and a loan balance of 14.5 billion yuan) imploded suddenly. Thousands of furious protesters assembled outside the company's headquarters in Dongguan, Guangdong Province. They demanded their money back. Such disruption to social stability, which if left uncontained could morph into anger at the government, is a red flag for Beijing. The last thing the CCP wants is to be blamed for failing to protect its people from financial criminals. The Chinese government is now taking off the kid gloves. In February, it seized $1.5 billion in assets from 380 fraudulent P2P lenders and arrested 62 suspects. Analysts say that only 10% of the 1021 P2P lenders operating as of March are likely to survive the crackdown. Serving the state In developed economies, regulators and incumbents typically use a combination of carrot and stick to maximize the benefits that fintechs offer while encouraging them to find ways to work in the existing financial system. China has a similar approach but its unusual environment foments extremes. Not only is there a huge demand for credit, but China also has excess savings and limited attractive investment options. To novice cash-flush retail investors, the allure of the returns promised by some P2P platforms proved too strong to ignore. The ensuing chaos convinced Beijing to strike hard - which it can do thanks to its authoritarian political system - to contain the fallout. There are going to be many more losers than winners. Beijing is in the process of drafting new regulations for P2P lending aimed at taming the volatile industry. The regulations will likely force many platforms to rely on institutional instead of retail investors for funding. Some platforms may be converted into internet-based micro-lenders. Lenders will be required to allocate general risk reserves and loan-loss provisions. Still, P2P lending will not disappear from China. The demand for credit is too strong. Once the sector is normalized, it can help boost private sector activity, one of the government's main policy goals. The same cannot be said for cryptocurrency, another fintech innovation that landed squarely in the Chinese government's cross hairs. In September 2017, China was the biggest virtual-currency market in the world, accounting for about 90% of Bitcoin trading. Bitcoin miners enjoying cheap electricity rates plugged away in remote provinces like Inner Mongolia. Crypto bulls at the time lauded how vibrant the scene was in China. When the first signs of a crackdown appeared in the fall of 2017, the techno-optimists brushed it off. Beijing couldn't be serious, they said. But Chinese regulators were dead serious: They banned fiat currency from being used in cryptocurrency purchases and outlawed ICOs (initial-coin offerings). They then blocked all crypto and ICO websites. By July 2018, the renminbi made up less than 1% of Bitcoin trading, while 88 Chinese virtual currency exchanges and 85 ICO trading platforms were shut down. Virtual currency, unlike P2P lending, mobile wallets or Internet banks, serves no policy goals of the Chinese government. Further, its anonymous and decentralized nature threatens the Chinese Communist Party's control over the financial system. To be sure, Beijing has legitimate concerns about crypto's prevalence in money-laundering schemes. But more importantly, before the crackdown virtual currency was a popular way to circumvent China's tight capital controls. Once cash is converted to digital currency, it's out on the blockchain, beyond the reach of Chinese regulators. Meanwhile, crypto's underlying blockchain technology itself remains of interest to Beijing, as long as the government is in firm control. Business is booming too. Chinese research firm Blockdata reckons that China's 263 blockchain projects are the most of any country and make up about 25% of the worldwide total. One can only wonder if the irony of a decentralized technology being reimagined for massive state-led projects - including some focusing on surveillance of people - is lost on China's rulers.In an April interview with Reuters, Jehan Chu, managing partner at blockchain investment firm Kenetic, summed up Beijng's approach to crypto and blockchain well: “I believe China simply wants to ‘reboot’ the crypto industry into one that they have oversight on, the same approach they took with the Internet.”


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