On July 15, the People’s Bank of China (PBC), China’s central bank, released a long-awaited document “Guiding Opinions on Promoting the Healthy Development of Internet banking”. It lays down the broad policy framework to govern internet finance in China, defines the term ‘internet finance’ specifically, and assigns jurisdiction of the sector to various Chinese regulatory bodies.
The release is timely, given that a largely unregulated sector is already a billion-dollar industry which the Communist Party of China (CCP) hopes will bring innovation, entrepreneurship and private capital into the Chinese economy.
The internet finance market began in the U.S. But China made it big business. Led by internet giants Alibaba Group and Tencent among a host of other smaller players, China has become the pioneer.
The Chinese Peer-to-Peer (P2P) lending market, consisting of money market funds like Ants Financial Group’s Yue’e’bao fund with $80 billion in assets, is one of the largest in the world. In January this year China opened the world’s first e-bank—WeBank, an online-only private bank—which lends to small and medium private businesses exclusively through virtual channels.
In 2014, China’s internet finance sector employed 390,000 directly and about 60 million indirectly, servicing more than 2 million enterprises. Revenues hit $138 billion, up 51% from $91.1 billion in 2013.
Yet the term internet finance, although originally coined by Xie Ping, director of research at the PBC, did not have an officially recognised definition till the guidance was issued this month.
The Guidance now defines internet finance as “traditional financial institutions and Internet companies that use Internet technology for: payments, internet lending, public equity financing, internet fund markets, internet insurance, internet trust,consumer finance”. Notably, digital currencies, such as Bitcoin, are not included in its definition, as it is difficult to regulate – and competition to Chinese mobile payment players.
China wants internet finance to enable entrepreneurship for the general public and financing for the middle class and SMEs, while generally improving the efficiency and quality of financing in China.The guidance actively encourages existing banks to build internet finance platforms and support SMEs. This will improve the internet tax policy, such as tax breaks to start ups, promote a credit infrastructure and market-based credit services.
This dovetails neatly with China’s Internet Plus action plan, recently unveiled by Premier Li Keqiang at the National People’s Congress in March, which aims to integrate the internet with manufacturing, agriculture and the financial sector. It fits well within the CCP’s plan to allow private capital and SMEs to play a more “decisive” role in the Chinese economy, as outlined in the 3rd party plenum document in November 2013.
However, for these plans to succeed, the government needs specific regulations to mitigate risk, strengthen trust in the system and protect both borrowers and lenders from practices like margin lending or potential bank runs. The recent stock market crash, and the 2014 collapse of 300 P2P lenders, shows clearly the sleepless nights that China’s gung-ho finance sector is giving the extremely risk-averse CCP.
The importance and need for strong regulation is emphasised by the new approaches that China’s internet companies are bringing to finance. Take WeBank, which became operational in January. It has no physical presence, and plans on conducting everything virtually, using facial recognition technology for identity verification to using big data to analyse borrowers’ online profiles on e-commerce and other platforms to assess risk.
These types of lending practices are unprecedented and hold unknown risks.
According to the Guidance, the PBC will supervise internet payment services, while the China Banking Regulatory Commission (CBRC), will be in charge of regulating internet loans, trust funds and consumer finance. The China Securities Regulatory Commission (CSRC), similar to India’s SEBI, will oversee equity-based crowd-funding, online insurance and P2P lending. Included are the eight regulatory steps needed, starting from filing with the authorities, mandatory third party deposits with qualified banks and dispute mechanisms, to risk disclosure and policies to protect depositors. This will all be coordinated by the State Council, the chief administrative body in China headed by Premier Li.
After three years of go-go growth and innovative products that made China the world leader, providing services to millions of lower and middle class Chinese, there is finally a workable regulatory framework for internet finance. It reflects the seriousness with which the party views these services, protecting investors while not suppressing innovation.
China’s success can set a global precedent for the development of internet finance across the world, especially countries like India and in Africa.
India and China share similar characteristics on indicators such as internet penetration and use of mobile technology. As outlined in a previous article, China’s internet companies are venturing abroad, and India is a major destination. China would also like to bring lending practices such as crowd funding to the BRICS New Development Bank and the AIIB, both of which India is a member of.
The future success of these internet finance models can be critical in bringing financial inclusion to those populations of developing countries who have long been left out of the world of enterprise.
Dev Lewis is the digital media and content coordinator at Gateway House. His research focus is China and India-China relations
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