Digitally Down to the Countryside: Fintech and Rural Development in China

Abstract

Digital finance has changed the landscape of financial service provision worldwide. China in particular, with a booming fintech sector and large numbers of users, is at the forefront of the expansion of digital financial services. As such, the country has become an important case for better understanding how fintech operates and what its expansion entails for socioeconomic development. This paper focuses on the provision of new models of digital finance in rural China by two Internet giants – JD and Alibaba. Against the backdrop of decades of generally unsuccessful attempts to expand financial coverage in rural areas by conventional bricks-and-mortar financial institutions, these two rural fintech models have the potential to expand digital financial service provision in new ways. This paper critically examines these fintech models, contextualises them within the broader trajectory of pushes to expand digital financial inclusion worldwide, considers the parallels with agricultural supplier contracting systems elsewhere, and explores the potential benefits and risks that they pose for rural development and rural livelihoods in China and elsewhere.

1. Introduction

Over the past decade the advent and rapid growth of digital finance – also known as financial technology or fintech – has radically changed the nature of financial service provision worldwide. This emerging market is characterised by diversity and dynamism, with the Internet serving to level the playing field between massive financial institutions and small-scale providers. At the same time, it has also presented regulatory challenges for governments, as financial ‘innovations’ upend and circumvent existing frameworks threatening to destabilise financial systems (Arner, Barberis, & Buckley, 2015). Alongside increasing Internet penetration across the Global South, digital financial services have come to be seen as a key strategy in the global financial inclusion movement – which perceives increased access to financial services by previously excluded populations as a driver of socioeconomic development (McKinsey Global Institute, 2016). From Africa to South America, from Southeast Asia to India, the integration of those at the margins of society into the emerging digital financial ecosystem is lauded as a worthy goal in and of itself, and one that has the ability to facilitate new forms of development (The Economist, 2014).

China has undoubtedly been at the forefront of this digital finance revolution, with the country now home to the largest and arguably most dynamic fintech sector in the world. Indeed, by 2016 the country was already the world leader in terms of market size and total users (Ngai, Qu, & Zhou, 2016), and has continued to consolidate its position over the past five years. This marks a dramatic shift in the country’s financial ecosystem, as financial service provision in the People’s Republic of China (PRC) has traditionally been heavily regulated and dominated by a few large state-owned institutions providing services at below-market rates – a situation resulting in credit shortages, particularly in rural areas (Ong, 2012). In contrast, contemporary China’s emerging (and initially loosely regulated) fintech ecosystem began as an experiment in diversity, with thousands of companies trialling new methods of providing financial services to hundreds of millions of people through digital technologies (Guo, Kong, & Wang, 2016).

In recent years the industry has consolidated around large players and China’s Internet giants – including Alibaba, Jingdong (hereafter JD), Tencent, and Suning, to name a few – which are able to leverage their nationwide e-commerce platforms to provide a variety of financial services to their customers. This represents a distinctive mode of fintech development in comparison with other markets, where the move to digital finance has been primarily driven by financial institutions. The Chinese case is also distinct as these Internet giants have particularly focussed on extending credit to the historically financially-excluded countryside, rather than just wealthier urban consumers – targeting rural people who now have access to the Internet through mobile phones, and thus form a potentially lucrative new market.

The push into the digital financial market by the Internet giants is significant in that they are able to draw on the huge amounts of data collected through their Internet and commerce business platforms. This is a potential game changer in rural areas where there has been a particular dearth of financial information on prospective borrowers, making it difficult for financial institutions to assess risk. In this way, digital finance in China has the potential to change how data are used in financial monitoring and beyond in a way that resonates with Chinese governmental goals, particularly in relation to the emerging social credit system which aims to both engineer a financialised form of ‘creditworthiness’ into society, while also providing a more standardised means of financial risk assessment (Loubere & Brehm, 2018; Zhang, 2020). At the same time, the emergence of digital finance in China is framed by both policymakers and providers as a boon for rural development and a means of increasing socioeconomic inclusion. For instance, a recent report from Alibaba’s research arm – AliResearch – states that the goal of fintech is ‘to provide inclusive financial services for the world where all consumers and producers have equitable opportunities in future development’ (AliResearch, 2017, p. 21). This chimes with the wider financial inclusion movement promoted by high-profile global development actors. In the words of the World Bank: ‘Technological innovations can lower the cost and inconvenience of accessing financial services. The last decade has been marked by a rapid growth in new technologies … [which] allow for a significant reduction in transaction costs, leading to greater financial inclusion’ (World Bank, 2014, p. 8).

China’s Internet giants are, therefore, poised to play a role in the transformation of China’s financial ecosystem, which has the potential to dramatically restructure socioeconomic relations within rural China and between the city and countryside. This points to an urgent need to systematically examine the implications of the rapid expansion of China’s Internet giants into financial markets. This paper represents a first step in this direction through the comparison of the rural lending practices of JD and Alibaba – two of the largest e-commerce platforms providing credit services to rural residents – followed by a critical discussion of this unprecedented extension of digital financial services to previously excluded populations. The paper draws on public information about the business practices of JD and Alibaba, data from the Peking University Digital Inclusive Finance Index, as well as interviews with digital finance practitioners. When direct quotes from these interviews are used, we provide a reference to the date in a footnote.

The rest of the paper is organised as follows: the next section presents an overview of the historical dynamics of rural financial system change in China. Section three outlines the ways in which the digital finance revolution has transformed China’s rural financial ecosystem. Sections four and five explain in detail the rural financial strategies and lending practices of JD and Alibaba. The sixth section is a theoretically informed discussion of the implications of this massive rural financial push on the part of these two Internet giants, weighing the developmental potentials against critiques of centralised commercial agricultural contracting systems, digital financial inclusion, and the emergence of new forms of surveillance capitalism. Section seven concludes the paper.

2. The historical trajectory of rural finance in China

Historically, access to financial services in China has been severely constrained. In the first half of the twentieth century, due to the lack of formal financial institutions in rural areas, many rural households engaged in locally-developed, and community-based, rotating savings and credit arrangements, allowing them to access larger sums of money at crucial periods, e.g. for house building, funerals, schooling, etc. (Hu, 2007). At the same time, during this period exploitative loan sharks offering credit at extortionate interest rates were prevalent across the Chinese countryside. Upon the establishment of the PRC in 1949, the Chinese Communist Party (CCP) sought to break the power of local loan sharks and landowners through the establishment of the Agricultural Bank of China (ABC) and a network of rural credit cooperatives (RCCs) across the country, aimed at providing non-exploitative and affordable financial services to communities and households (Cheng, 2006). During the agricultural collectivisation of the Mao era, RCCs came under the control of the people’s communes. Due to the suppression of private entrepreneurial activity, and the demonetisation of rural life through the work points system, RCCs functioned as a means of financing rural industry and agriculture, as well as extracting rural resources for the larger state project of urban industrialisation aimed at technological upgrading (Zhang & Loubere, 2015).

With the onset of the economic reforms the late 1970s and early 1980s, the rural financial landscape changed dramatically. The RCCs were put under the administration of the ABC, and quickly became important local institutions providing crucial services as rural incomes rose. Between 1978 and 1990, rural savings in the RCCs increased from 16.6 billion yuan to 214.5 billion yuan (Cheng, 2006, p. 27). However, the rural credit situation continued to be constrained. The locally-based RCCs were required to transfer 30 per cent of all savings to the ABC at low rates, reducing the amount of lending capital available in the townships and villages. Moreover, the money that was available for lending usually went to local governments and industries, rather than to households (Tam, 1988). This situation was further exacerbated in the 1990s in a number of ways. First, the ABC retreated from the countryside to focus its business in urban areas. Second, the Postal Savings and Remittances Bureau (PSRB) was established and, since it provided higher rates of interest on deposits than the RCCs, it deprived local financial institutions of savings. However, the PSRB stored its deposits in the central People’s Bank of China, effectively extracting capital from the countryside to the centre. Finally, in the late 1990s rural China experienced a financial crisis, which resulted in the closure and consolidation of many RCCs and rural cooperative foundations (Tsai, 2004; Zhang & Loubere, 2015).

In this context, China’s rural financial system has largely served to extract capital from rural areas for investment in the urbanisation and industrialisation of cities, with the result that lending in rural areas has been severely restricted (Loubere, 2019; Loubere & Zhang, 2015). In 2014, the total value of loans borrowed by rural households was 5.4 trillion yuan, accounting for only 6.4 per cent of the total national loan value. Only 27.6 per cent of the loan applications by rural households were approved, considerably lower than the national average of 40.5 per cent. Moreover, for every 10,000 rural people there is only one financial service worker, while there are 329 per 10,000 people in urban areas (People’s Bank of China, 2014). Clearly, much of rural China has been financially excluded and its population largely underserved.

Starting in the early 2000s, the central government has sought to refashion the RCCs into locally-focussed development institutions through the mandate that they provide subsidised microcredit to households (State Council, 2003). From 2006 onwards the rural financial system has been further liberalised with a particular focus on the reduction of barriers to financial institutions seeking to operate in rural areas, and the promotion of private or semi-private financial intermediation in the countryside to meet the demand for small loans from households.

However, despite the introduction of new policies aimed at supporting the expansion of rural financial services, rural people’s access to formal finance – particularly credit – has remained seriously constrained. As of 2017 only 27 per cent of farmers were able to obtain loans from formal institutions and it is estimated that the rural financial shortage was as high as 3.05 trillion yuan – a staggering figure equivalent to the annual production value of Shanghai (Wang & Li, 2017). These figures point to a number of hard truths for rural finance reformers, including the fact that a large number of farmers have no access to basic lending services, the proportion of agricultural loans to short-term loans is low, and there is a serious lack of risk control and credit information (Zhou & Zhou, 2009). In order to address these issues, the government has sought to transform the rural financial system at multiple levels by supporting a variety of traditional banks, non-banking financial institutions, and small private financial organisations – such as microloan companies (MLCs) and village and township banks (VTBs) – in the hopes that this can expand formal financial coverage.

Across the country a total of 1,045 counties (or 55 percent of all Chinese counties) have approved the establishment of VTBs, and by the end of December 2015 a total of 3,676 new rural financial institutions were approved – including 2,303 RCCs, rural cooperative banks, and rural commercial banks, and 1,373 VTBs, MLCs, and Mutual Aid Cooperatives. This influx of new institutions, many of which provide a range of different products, has undoubtedly increased financial coverage, particularly with regard to lending. Private lenders in particular often have a good understanding of local contexts and the conditions of borrowers, reducing their management costs. However, access to financial services has nevertheless remained relatively limited, especially for regular farming households, as most of these institutions target rural SMEs and/or wealthier specialised farmers who have rented out large tracts of land to scale up production (Huang, 2017).

The failure of rural financial liberalisation to make a substantial impact on service provision points to fundamental difficulties inherent to the Chinese rural financial terrain. As mentioned above, China’s rural economy has historically been a site of resource extraction rather than capital retention. Financial institutions have thus found it difficult to survive with a strategy of investing in rural areas themselves (as opposed to appropriating rural resources for investment in more profitable urban areas). This is primarily due to the fact that agriculture is risky, small scale, and cyclical – implying that the costs of risk management are likely to outweigh profits – making it unattractive for commercial profit-seeking and risk-averse financial institutions. In this sense, the liberalisation of China’s rural financial system has exacerbated the underlying problems of rural banking rather than reduce them, as the new institutions are purely profit seeking, and the traditional state institutions have been increasingly pushed to operate based on market logics (Loubere, 2019). There are also problems from the perspective of borrowers themselves. Rural people frequently complain about the difficulty of meeting the requirements for borrowing, with lenders often requiring large amounts of information and long waiting times (Loubere & Shen, 2018). In our experience, farmers will often say that they do not want to borrow, as getting a loan requires a seal of approval from village and township officials, financial institution risk control departments need to inspect houses and other assets, and borrowers ultimately have to mortgage their property. This points to a serious lack of credit information in the countryside. It also suggests that in order to truly transform the rural financial landscape through the expansion of coverage as envisioned by proponents of rural financial reform in China, there needs to be a more fundamental change than simply facilitating the liberalisation of the rural financial sector for bricks-and-mortar institutions.

3. Emerging opportunities for digital finance in rural areas

The previous section points to an apparent paradox in rural financial service provision in post-reform China. On the one hand rural China represents a potentially massive market, comprising a consumer base that has become much wealthier over the past few decades (primarily through migrant work and remittances); on the other hand, this vast market is chronically underserved, and attempts to expand traditional financial coverage have generally failed, despite the liberalisation of restrictive rural financial regulations. Drawing on the experiences of the global financial inclusion and fintech movements, Chinese policymakers and financial technology experts have diagnosed the problems facing rural finance in China as originating from high transaction costs (for both customers and institutions), a lack of mortgageable assets, and a lack of reliable credit data. They have then identified technical strategies, including the use of mobile terminals and big data, as a means of remedying financial exclusion in the countryside, and have lobbied the government to encourage both traditional financial institutions and Internet companies to move into rural financial service provision (Xie, Zou, & Liu, 2014; Xie, 2018).

These calls have not gone unnoticed, and in recent years both Internet giants and smaller fintech companies have rapidly expanded into the rural financial market. Moreover, encouraged by the adoption of global financial inclusion discourse in government documents and speeches, digital finance providers have consciously included financial inclusion messaging in their own strategies – e.g. Ant Financial’s website includes a section on financial inclusion with testimonies of the those who have benefited from easier access to loans (Loubere, 2017). The Peking University Digital Inclusive Finance Index has charted the influx of financial service providers and the corresponding financial coverage in the countryside over the past decade. Primarily using data from Ant Financial, the index intends to reflect the development of digital finance in a comprehensive manner. The index consists of 24 factors measuring three dimensions: coverage, depth of use, and the degree of digitalisation. From 2011 to 2015 the countrywide Index score grew from 40 to 220 – an increase of 450 per cent. This growth demonstrates a more levelled playing field between ‘developed’ and ‘underdeveloped’ areas in terms of financial coverage, with the gap between domestic prefecture-level cities narrowing substantially. This seems to indicate that financial services provided through digital mediums are less constrained by regional development patterns, resulting in more geographical coverage that does not precisely follow the standard patterns of uneven development that have plagued post-reform China, even if the poorest regions and individuals are still more likely to be excluded.

Increasing access to digital financial services would not have been possible in the absence of the massive expansion of Internet infrastructure in China’s rural areas. By the end of 2015 the number of rural netizens had reached 195 million – increasing at an annual rate of 9.5 per cent – accounting for 28.4 per cent of total Internet users in the country. This growth has been fuelled by increasing incomes, the popularity of smart phones, and the expansion of affordable mobile coverage (CNNIC, 2016). By 2015, China’s 3 G network covered all townships and the 540,000 administrative villages across the country, and the 4 G network covered the vast majority of more economically-developed townships. Additionally, there were more than 130 million broadband interfaces in rural areas, and 91 per cent of administrative villages had broadband coverage, with the total number of rural broadband users reaching 93.77 million (Ji, 2016).

This new digital infrastructure has provided the basis for a rapid expansion of digital finance provision in China’s rural market, and has addressed some of the key challenges faced by traditional financial institutions in the country. In particular, it has eliminated the need to build and maintain physical outlets, which were costly due to the lower population density and less-developed transportation infrastructure in rural China. Service provision by mobile phone has reduced transaction costs greatly, and also saves institutions money by limiting the need to invest in physical equipment, as transactions can be taken care of in the cloud. The results of this ability to provide financial services virtually and cheaply have been explosive – 2016 the total value of mobile payments in China exceeded $US 790 billion, or 11 times more than that of the United States (Wang et al., 2017).

In addition to being less geographically constrained than bricks-and-mortar financial institutions, digital finance has a number of inherent advantages in the context of rural China. For one, it has allowed for innovations in payment and financing methods, which have generated huge amounts of raw data and provided new possibilities for rural credit reporting (as well as the development of new forms of surveillance capitalism in the countryside). This has the potential to address one of the biggest issues facing rural lenders – the lack of information needed to produce reliable credit scores and assess the riskiness of potential borrowers. Traditionally, rural lenders have generally only been able to guarantee credit to large enterprises, many of which have, or had, links with local governments that could act as guarantors. This situation has resulted in the exclusion of small- and micro-enterprises and ordinary farmers, as they are usually without collateral, a ‘modern’ credit consciousness, or credit information (Ong, 2012; Tsai, 2004). Agriculture, in particular, has presented major problems for traditional lenders in China and elsewhere, as it is an inherently risky activity based around seasonal, rather than regular and predictable, earnings. Thus, despite the high demand for agricultural loans, rural financial institutions have generally avoided them as much as possible, particularly for small-scale farmers.

Digital finance, on the other hand, provides the potential for new ways of assessing risk through big data, cloud computing, and other emerging technologies. It also provides the means to track funds and production in real time, reducing risk and allowing for more efficient and cost-effective loan products that can better meet the needs of farmers. Internet lenders also have had the advantage of a lax regulatory environment, particularly in the early years of the industry’s development. State-owned banks have strict controls on the amount of interest they are allowed to charge on loan products, which substantially reduces the amount of profit they are able to earn. Newer private institutional forms, such as the VTBs and MLCs, have more leeway, and are allowed to charge up to four times the rate set by the People’s Bank of China (Loubere, 2019). Internet lenders, however, have been relatively free to charge much higher interest rates.

When the fintech boom began in 2004, marked by the official launch of Alipay, the regulatory environment was generally open and supportive. For example, while the first Chinese P2P platform, Paipaidai, started operation in 2007, the first set rules governing the P2P industry was not issued by the regulators until 2016 (State Council et al., 2016). Many considered the first decade of the development of digital finance in China to be like the Wild West – innovative startups with solid technological capacity and Ponzi schemes appeared all at once. The space allowed by the regulators enabled entrepreneurs to experiment and to establish a market for China’s digital financial services. Over the past couple years the regulatory environment has become more constrained with the central bank declaring that digital finance should play a complementary role to the traditional financial sector and announcing the rationale and principles of regulatory rules. In late 2019 this was taken a step further and all P2P lenders have now been required to transform into microloan companies within one or two years, with a minimum capital requirement of 50,000,000 yuan (State Council et al., 2019). A number of provinces and municipalities – including Shandong, Hunan, Henan, Chongqing and Shenzhen – have even moved to completely ban P2P lending (The Paper, 2019), and there are now only three platforms still in operation.

4. JD’s quantitative assessment innovation

In the context of the expansion of digital finance into rural areas in China, JD Finance has been at the forefront of adopting the discourse of global financial inclusion and developing new technologies in an attempt to address traditional problems with rural lending (Since 2019 JD Finance has rebranded and been renamed JD Digital Technology). The company is one of the three business arms of the JD Group, and one of the largest fintech operators in the country and the world. The company promotes its work within the rural finance sector through the language of corporate responsibility – for instance by partnering with the Grameen Foundation to establish a crowd funding microfinance project (JD.com, 2014). At the same time, rural finance is an integral part of the company’s wider business operations, with rural production being a key element in an integrated supply chain linking rural and urban areas. For JD, expanding financial coverage not only opens up new markets, but also makes new logistics chains possible. As such, the company sees the expansion of digital financial inclusion as having the potential to produce an entirely new, and more profitable, market ecology. For this reason, since 2015 JD Finance has aggressively moved into rural areas, and by the end of 2017 covered 1,700 counties and 300,000 administrative villages.

JD Finance’s rural strategy – and the general strategy of most Internet giants entering into the rural financial market – can be concisely summed up in the catchphrase ‘agricultural products to the city, e-finance to the countryside’. With a view to the entire supply and logistics chain, the company seeks to be an all-encompassing platform for agricultural inputs procurement, production, acquisition, processing, and distribution – giving JD full control over market activity from the production and distribution of raw materials, to the sale of final processed goods. JD Finance, therefore, has branched out into the provision of diversified services in rural areas, including not only credit, but also various types of technical training, payment services, insurance, wealth management, and crowd funding, aimed at the wholesale integration of agricultural producers within the JD platform.

One of the key products provided by JD’s rural financial arm is the ‘Digital Agricultural Loan’ (jingdong shuzi nongdai). The provision of Digital Agricultural Loans is based on a quantitative risk assessment model, which takes into account historical and forecasted agricultural production data to determine if farmers and agricultural cooperatives are ‘creditworthy’. This eliminates the need for collateral or guarantors, and echoes financial inclusion projects around the world that attempt to reduce transaction costs and risk by rating the previously ‘credit invisible’. This phenomenon, which Rob Aitken refers to as ‘constituting the unbanked’, is characterised by financial providers seeking to draw on alternative sources of data – in this case data related to agricultural production – to scale up inclusive financial initiatives. While certainly these innovations have made it possible to extend financial services to previously unbanked populations, they also serve to fracture, segment, and exacerbate inequalities in societies in new ways (Aitken, 2017).

Alongside the provision of loans, JD is also involved in providing production management software to rural producers. For instance, for animal husbandry enterprises JD provides software that can collect data and monitor all aspects of the production process. According to JD, this both helps the producers to streamline their operations and provides data that can be used for assessing loan suitability.

However, due to the lack of credit scoring in rural China, JD’s quantitative risk assessment model is still a work in progress, and large amounts of data still need to be collected manually. In particular, staff members need to collect background information about agricultural producers, including licencing information and historical financial/production statements, which serve as the basis for the preliminary credit assessment. This is followed by interviews, and the digitisation of data for input into JD’s models. Once this baseline data has been collected, agricultural producers can be assessed using data models that are continually being adjusted as more data is collected across rural China. In this way, JD’s quantitative risk assessment model mirrors a more global shift of ‘small data being scaled, combined with big data, and being made amenable to big data analytics’ (Kitchin & Lauriault, 2015, p. 473).

According to JD, this small-to-big data risk assessment will become increasingly accurate in its predictive capabilities and able to accurately detect fraudulent activity. JD also claims it will allow the company to predict future earnings at a level of precision that the producers themselves often cannot attain. In the words of one JD executive: ‘Based on our understanding of the farming process, we digitise, quantify, and build up a mathematical model … . This allows us to make a detailed prediction of what will happen in the future’ (Interview conducted 2018/01/09). In this sense, JD’s lending model conceives of a rural economy that can be fully quantified and made legible according to financialised logics, thus eliminating the uncertainty and risk inherent in agricultural production. While this belief in the risk-reducing powers of alternative and big data resonates with digital financial inclusion initiatives around the globe, it is worth pointing out that critical research has found that the collection of alternative data in particular cannot overcome the inherent difficulties of lending to the poor (Bernards, 2019), and that data innovations aimed at reducing risk often focus on the borrower’s propensity (rather than actual ability) to repay, which can result in exploitative practices (Langevin, 2019).

The poultry industry provides a good example of how JD’s Digital Agricultural Loans work in practice. The breeding cycle of a broiler chicken is about two months, and during this time approximately 12 yuan of feed is needed per chicken. The traditional practice is to lend 12 yuan per chicken to the farmer on the first day of the cycle, and then for repayment to occur after two months – thus requiring the farmer to pay interest on the full amount for the entire period. However, this is not an optimal arrangement for borrowers, as the full amount of capital is not needed throughout the whole period. On the first day, each chicken actually only needs 0.20 yuan of feed, and over the first seven days they only need feed worth 0.50 yuan. Thus, the majority of borrowed capital is idle for most of the loan period, but the farmer has to pay interest on it anyway. JD’s Digital Agricultural Loans change this dynamic by integrating the poultry and feed producers while monitoring production in real time. Funds are not lent out ahead of time, but rather based on the production needs, calculating the amount of money needed for feed use to the gram. As such, over the first seven days of the chicken cycle JD sends the exact amount of funds needed directly to the feed factory, which sends the correct amount to the farmers accordingly. Thus, farmers only pay interest on the funds in use, rather than wasting money on idle capital. Interest is calculated on a daily basis, which substantially reduces costs for farmers. Only 0.60 yuan needs to be paid in interest per chicken – half the cost of a traditional loan – resulting in a profit of at least two yuan.

While JD loses money on interest, they benefit by integrating farmers into their all-encompassing production cycle platform, providing the credit and other services for the farmers, feed producers, and other businesses along the production chain. At the same time, in addition to the direct profit from the loans, they also gain access to large amounts of valuable data, which feeds into their risk control models and has the potential to open up new markets.

JD frames the integration of farmers into their emerging agricultural production ecosystem as a win-win, claiming that part and parcel of Digital Agricultural Loans are various risk hedging mechanisms, such as basic guarantee orders with processing plants and feed mills, ensuring that farmers have access to inputs and a place to buy their product. In other words, even if market prices fall, agricultural output is purchased at a predetermined price, and input prices also are pre-negotiated. It should be noted, however, that while on the cutting edge of the collection and use of alternative data in the context of rural China, what JD is attempting to achieve is not fundamentally different from agricultural contracting systems elsewhere, which often serve to extract capital from rural areas and trap farmers in exploitative relationships that are difficult to escape from (Clapp, 1988; White, 1997).

In the context of the poultry industry, this new wealth of data feeds into a constantly expanding management software system that has the ability to further draw on data generated by thermometers, hygrometers, and other monitoring instruments. This information is then made available to farmers with the goal to help them better care for chickens and to scale up their production. Borrowers are also integrated into JD’s vast and rapidly expanding logistics and payment system, which groups farmers’ product into joint shipments, secures feed and other inputs, and ensures access to markets. In so doing, JD frames their system as having the potential to solve the problems of both small-scale farmers – their traditional vulnerability to changing markets, reliance on middlemen, and high costs due to a lack of economies of scale – and large-scale agricultural operations that need to improve technology to scale up production and achieve industrial intensification. Moreover, as the system grows and incorporates more data points, JD believes the predictive capacity will improve. The ultimate goal for a company like JD is to create an all-encompassing logistics system that controls inputs, production, payments, and sales through modelling driven by data and with the aid of artificial intelligence (AI). In this sense, JD Finance is pushing the boundaries of financial service provision, and is instead engaged in a project of building an overarching agricultural market ecosystem, of which finance is just one element. The vision is of automated agricultural management, with AI regulating and monitoring all aspects of the production process. In the context of poultry, this would mean tens of thousands of birds can be effectively managed by no more than a handful of staff, a system that would automatically feed and water the chickens, while also cleaning faeces and monitoring environmental conditions. Needless to say, this would represent a major transformation of agricultural labour in rural China, with obvious implications (not all good) for rural livelihoods. In particular, it remains to be seen if this kind of arrangement actually benefits poorer small-scale farmers, or merely serves to further enrich the larger-scale farming households that have been contracting out large amounts of land in recent years.

In order to achieve this goal JD rural finance still has a long way to go, but the company has nevertheless been expanding its rural digital financial coverage at an unprecedented rate. Provision of digital agricultural loans only began in March 2016, yet by 2017 hundreds of large farms and cooperatives were covered, representing tens of thousands of small-scale farmers. JD aims to particularly target the animal husbandry industry going forward, including pork, eggs, dairy, beef, sheep, and poultry. There is certainly large scope and continued growth in these industries providing the potential to create the incorporated logistic chain from the countryside to the city envisioned by JD. The meat and poultry industries alone have an annual output value of 150 billion yuan.

5. Alibaba’s digital financial push

JD is not the only Internet/tech giant with ambitions to create a new digital financial and logistical ecosystem in the Chinese countryside. Among others, Alibaba and its spin-off company Ant Financial (renamed as Ant Group since July 2020) are perhaps the best placed to capitalise on the expansion of rural digital finance. This is because Alibaba already has a widespread rural market network through Taobao, currently the largest e-commerce platform in China and second largest in the world. Taobao came online in 2003 and has exhibited explosive growth since 2008. The platform currently has nearly 800 million registered users and an average of 48,000 items are sold per minute. With the staggering development of e-commerce, China now accounts for more than 40 per cent of global e-commerce and its total annual online sales value is greater than that of the United States, Germany, France, Japan, and the United Kingdom combined (K. W. Wang et al., 2017).

This rapid expansion of e-commerce has had profound impacts on China’s rural economy. In 2009 Alibaba announced its first ‘Taobao village’, or cluster of e-commerce businesses operating in a single locale. For a village to become a Taobao village, it needs to achieve a total annual value of e-commerce transactions, or gross merchandise volume (GMV), of no less than 10 million yuan and have a considerable proportion of e-business owners among the villagers – at least 100 active online stores or a minimum of 10 per cent of local households operating online stores. The Taobao village phenomenon has spread widely, with the largest concentrations in the coastal regions, notably Zhejiang, Jiangsu, Guangdong, and Shandong. The number of Taobao villages skyrocketed from 212 in 2014 to 3,202 in 2018. As rural e-commerce flourished, Taobao village groupings have emerged forming Taobao townships – places with at least three Taobao villages. By 2018 the number of Taobao townships reached 363 – a 20-fold growth from 2014 when there were only 17 in the country. Alibaba has also been involved in central government plans aimed at expanding e-commerce in rural areas, such as the ‘village Taobao programme’ (cuntao jihua) or the ‘thousands of counties and tens of thousands of villages programme’ (qianxian wancun jihua). These plans aim to inject 10 billion yuan to establish 1,000 county-level service stations and 100,000 village terminals to reduce transaction costs and promote rural e-commerce. Between 2014 and the end of 2018, approximately 40,000 villages across almost every province of China were connected to e-commerce through the programme, representing a vast logistical ecosystem across rural China that can supply agricultural produce to urban markets (AliResearch, 2017; Couture, Faber, & Gu, 2018; Lian, Bian, Su, & Cao, 2017).

This nationwide logistics and commerce network has necessitated the creation of a new type of financial infrastructure. Alibaba’s engagement with financial service provision started with Alipay, which was officially launched in 2004. Alipay was established to provide a solution to the lack of trust between sellers and buyers on Taobao. As a third party payment system, Alipay essentially serves the role of a credit intermediary or a guarantor that ensures the integrity of online transactions between total strangers. However, Alipay was only the first step in a wider strategy, and by the time it was put under the control of Alibaba’s fintech arm Ant Financial in 2014, the company was well positioned to extend a range of financial services to the rural population. By March 2017, Alipay had 163 million rural users registered to make payments for online products, utilities, or even hotel reservations (Lian et al., 2017).

In September 2015, Alibaba’s MY Bank rolled out its ‘Wangnong Loan’ product, which provides credit of up to 500,000 yuan without any mortgage or guarantor at a monthly interest rate of one percent for a duration of six months, 12 months, or 24 months. By early 2016 the Wangnong Loan already covered 2,425 villages in 139 counties and 24 provinces across the country, with an average loan amount of 44,000 yuan. Like JD’s operations, the lending process for the Wangnong Loan combines elements of manual applications with the collection of credit data aimed at feeding into an automated system in the future. Prospective borrowers must be recommended to apply through the village Taobao terminal, and must provide identity documents and information about assets. The recommenders mainly come from two sources: one is those working with the Taobao terminals in respective villages and the other is the China Foundation for Poverty Alleviation (CFPA) Microfinance (zhonghe nongxin). CFPA Microfinance was one of the original microfinance programmes in China set up though an NGO-government partnership, but in 2008 it spun off into a private independent organisation.

Alibaba then manually conducts an audit while saving the credit data for future use. Loan approvals often take three to five days, which is substantially less time for approval through state-owned banks or rural credit cooperatives. The person who recommended the lender is then responsible for reminding them to repay the loan, a method of local surveillance aimed at reducing transaction costs through joint liability lending, which is prevalent in the global microfinance movement. In this way, the Wangnong Loan represents a hybrid form of digital/manual risk control. Alibaba has access to big data on the commercial activities of regions and localities, which is combined with offline data collected through financial documentation and local people as recommenders, references, and surveillants. In the absence of collateral and conventional credit information in rural China, these two data streams are then jointly analysed and fed into risk control algorithms. In this way Alibaba is collecting and harnessing data emerging from interpersonal relations at the local level that have thus far been difficult to collect or quantify in any systematic way.

The company expects that as they continue to collect data, their AI systems will continue to learn and improve their predictive capabilities, allowing for increased automation of the lending process in the future. Alibaba sees this as a way of transitioning away from manual data collection, while still being able to assess risk with high levels of accuracy, and thus provide loans to borrowers with little or no assets. The data are also augmented with the continued expansion of the Taobao e-commerce platform across the countryside, as user data inform lending practices as well. While MY Bank’s so-called ‘310’ model – three minutes to apply, one second to receive the fund, and zero human intervention – has been used to successfully provide microloans to tens of millions of small and micro-businesses, the lending programmes in rural areas continue to rely on additional non-digital information to complete evaluation of loan applications. It remains an open question as to whether this mass data collection can actually provide the predictive function that Alibaba envisions to drive lending decisions purely based on big data analytics.

In effect, like with JD, Alibaba’s digital lending is just one element in a much wider strategy of creating a coherent and integrated financial/logistical ecosystem incorporating financial services and rural marketisation. Alibaba is geared to create supply chain finance in the rural context such that the demand for the various financial services of producers and associated businesses are integrated into, and covered by, Ant Group’s comprehensive rural finance/logistical ecosystem.

And this is just the beginning of a much bigger rural strategy. In 2016, Ant Financial established its rural finance section and introduced a comprehensive package of rural financial services – including loans, payment, insurance, and wealth management. The company plans to inject one trillion yuan worth of loans within three to five years. At the root of Alibaba’s rural financial development strategy is the goal of integrating their own big data and technical capability with the smaller data resources of local governments. In September 2020, MY Bank announced that it aspires to serve 10 million small and micro businesses through supply chain finance within the next five years, and an important means to achieve the goal of greater inclusion is by establishing strategic collaboration with 2000 rural districts/counties (China Security Journal, 2020). Clearly, it is well recognised that in addition to data, more in-depth and nuanced local knowledge is necessary to achieve the company’s goals.

6. Discussion: the implications of rural fintech in China

These examples of the efforts of China’s two largest e-commerce platforms to expand into the rural financial market and create integrated market ecosystems represent radical visions of the country’s future rural-urban socioeconomic relations. Importantly, both companies are not only framing their rural strategy in terms of their own business interests, but rather depict their push to the countryside as a benevolent win-win, where the expansion of e-commerce and financial services through new technologies promotes beneficial forms of socioeconomic development for rural places and their populations, while also more effectively transferring agricultural products to the cities for consumption. As such, China’s Internet giants depict themselves as playing a crucial role in the construction of a ‘modern’, ‘civilised’, and ‘harmonious’ countryside in line with governmental plans and strategies, and reflecting the concept of ‘scientific development’ that has underpinned contemporary Chinese approaches to achieving rural modernity and prosperity.

In addition to reflecting Chinese development narratives, both JD and Alibaba also frame their activities within wider global rural development discourses. In particular, the expansion of e-commerce is depicted as part and parcel of the goal of creating ‘inclusive markets’ for rural development, promoted by the United Nations Development Programme (UNDP) and others. In the words of the UNDP, inclusive market development ‘not only addresses poverty alleviation but typically several of the other Millennium Development Goals (MDG’s)’ (United Nations Development Programme, 2010, p. 9). Key to this vision of inclusive market development is the expansion of financial inclusion initiatives, which are seen as the bedrock upon which socioeconomic development and poverty alleviation can occur within an inclusive market system. As the World Bank states in their 2014 Global Financial Development Report: ‘Financial inclusion is important for development and poverty reduction. Considerable evidence indicates that the poor benefit enormously from basic payments, savings, and insurance services. For firms, particularly the small and young ones that are subject to greater constraints, access to finance is associated with innovation, job creation, and growth’ (World Bank, 2014, p. 3). The new frontier of financial inclusion is digital finance, and recent studies in other contexts have suggested that the provision of digital financial services both promotes development and reduces poverty, with one high-profile article even claiming that access to the M-Pesa digital payment platform pulled two percent of the Kenyan population out of poverty (Suri & Jack, 2016). This has led many to believe it is now a ‘scientific fact’ that integration into the digital financial system (and by extension inclusive e-markets) reduces poverty and promotes development (FAO, 2017).

With its unprecedented expansion of e-commerce and digital finance over the past decade, China is widely seen as being at the forefront of the inclusive markets/finance revolution. Indeed, a recent joint report by the People’s Bank of China and the World Bank highlights perceived successes of China’s approach, and seeks to provide advice for other countries attempting to go down a similar path (World Bank Group & People’s Bank of China, 2018). In this vein, both JD and Alibaba see themselves as being at the vanguard of this digital push to the countryside. Ant Financial’s own website describes itself as ‘a technology company that brings inclusive financial services to the world … to support the future financial needs of society’. And in a recent report, AliResearch states that the ‘rapid adoption of Internet and e-commerce globally has offered a historical opportunity to promote inclusive development … [and] to effectively provide equitable development opportunities for every section of society’ (AliResearch, 2017, p. 10). As such, the involvement of both companies in the creation of integrated logistics chains, the expansion of their e-commerce regimes, and (crucially for all of this to function) the development of an inclusive digital rural financial system, is all perceived as inherently beneficial for society, and reflective of China’s continued march towards rural modernity and prosperity.

There can certainly be no denying that this expansion of Internet financial services has had a profound impact on the lives of rural people and the operation of rural businesses that were previously unable to access formal financial services. JD’s approach has the potential to play a role in transforming how agriculture works in China. The company’s lending products for broiler chickens not only allows smaller farmers to participate by providing them with technology and previously unavailable credit, but it also integrates them into a market and logistics chain, eliminating middlemen and potentially allowing for more profit for the farmers themselves. Similarly, Alibaba cuts out middlemen and allows rural people to get straight to the market. The Taobao platform, and the development of Taobao villages and townships, also provides the basis for small actors to link up and assert themselves in ways that were not previously possible as a group. For certain rural actors this type of market integration and financial inclusion most certainly has the potential for empowerment.

The apparent success of China’s Internet giants in extending commercial financial services to the countryside is all the more significant considering how previous attempts to expand financial inclusion in rural China have failed (see Section 2). The reason that these digital finance providers have managed to overcome seemingly intractable hurdles is through the production of alternative and big data and the advancement of AI systems to process them. This has been transformative for two reasons. First, it addresses the problem of rural people lacking collateral, which has been the primary reason for credit bottlenecks in the Chinese countryside. Secondly, it creates a process by which large amounts of previously inaccessible credit data have been generated, remaking the rural financial landscape and creating a data rich environment where before there was essentially a data blackout. This makes it possible for credit to be dispersed based on the perceived future productive capabilities of prospective borrowers assessed through modelling. This changes the entire lending model at a fundamental level. Traditional credit provision is based on two points – the assessment of creditworthiness at the beginning, and either repayment at the end or the claiming of collateral upon default. Digital agricultural loans, in contrast, have supervision, assessment, and surveillance built into their design, and thus interaction between the lender and borrower happens at innumerable points throughout the lending/production/repayment process. This is a game-changer with far-reaching implications going well beyond the simple provision of loans.

However, some of the implications of this sea change are also worrying, and there is cause to question the pervasive optimism underpinning the narrative of beneficial economic inclusion. If integration into e-commerce platforms and digital financial inclusion actually represent a straight-line to rural development, as proponents suggest, then China is positioned to see further dramatic reductions in rural poverty and socioeconomic advancements on the back of the initiatives pushed forward by China’s Internet giants. However, not mentioned in the accounts of the Alibaba, JD, and mainstream global development institutions is the fact that inclusive markets, the rationalisation and centralisation of agricultural production, and ‘constituting the unbanked’ (Aitken, 2017) through processes of financial inclusion are heavily contested concepts – with a robust critique of this type of economic inclusion as a means of promoting development having emerged over the past decade (Bateman, 2010; Bernards, 2019).

In particular, it is important to note that the type of rural restructuring implied in both JD’s and Alibaba’s visions, while revolutionary considering the amount of raw data they aim to produce and collect, is not actually fundamentally different from agricultural supplier arrangements and contracting systems that exist elsewhere. Research has shown that in other contexts this kind of centralised, and often locally monopolised, creation of rural-urban agricultural logistics chains can end up resulting in exploitation, rather than empowerment, for farmers – particularly small scale and poorer ones (Sivramkrishna & Jyotishi, 2007). At the same time, this kind of restructuring has potentially negative environmental implications with agricultural outputs being shifted from local markets to national and even global supply chains, resulting in a larger ecological footprint and reduced sustainability compared with previous, more locally-oriented modes of agricultural production.

The global microcredit and financial inclusion movements have also been the target of critical studies, with recent impact assessments countering claims of positive outcomes of microcredit programmes (Duvendack & Maclean, 2015; Duvendack & Mader, 2019), contesting the argument that financial inclusion results in female empowerment (Goetz & Gupta, 1996; Maclean, 2013), and pointing out that inclusion into the formal financial system actually tends to reproduce exploitative relations at the local level (Bateman, 2010; Taylor, 2011, 2012). Digital inclusion has also come under fire, with critics pointing to India’s recent demonetisation efforts and even directly contesting the claims of poverty alleviation related to M-Pesa in Kenya (Bateman, Duvendack, & Loubere, 2019; Mader, 2016).

At a more fundamental level there is a lack of discussion on prioritising financial health over profitability, efficiency, and convenience of the technological applications. After all, fintech should be seen as a means to an end, with human wellbeing placed at the centre of concern. We only need to look to the examples of Uber, Amazon, and the Chinese digital gig economy to realise that the application of digital technologies can lead to highly exploitative outcomes, even if this is an unintended consequence (Lecher, 2019; Rao, 2019; Sainato, 2019).

The alternative and big data push also comes with its own set of anxieties as we enter into an age of pervasive digital surveillance being developed by both governments and companies worldwide. In the context of the United States, we have the examples of Amazon and Palantir, e-commerce and tech companies that have leveraged their ability to produce and process predictive big data to work with police and border control forces (Hao, 2018; Winston, 2018). In the context of China the efforts of JD and Alibaba can also be seen as the expansion of a comprehensive system that Shoshana Zuboff has termed ‘surveillance capitalism’, where personal data itself becomes the commodity (Zuboff, 2019). Surveillance capitalism is already well developed in China due to the high levels of Internet penetration and the expansive e-commerce system. However, rural areas have continued to be a blank spot in the data landscape, which presents huge opportunities for big tech companies looking to capitalise on new sources of data.

As we can see from the two examples in this paper, the integration of rural areas and people into the digital financial system certainly has the potential to increase rural incomes, generate employment, and improve agricultural productivity. However, it remains to be seen how these benefits will be distributed across rural areas and populations. The two cases also suggest that fintech has taken different forms in shaping China’s rural financial development. Based on intimate knowledge of local modes of production and aided by the accumulation of producers’ data, JD’s lending model is built-in to every step of the production process and deviation from the predicted behaviour would be interpreted as a sign of risk. In contrast, Alibaba’s is less tied to any specific industry. Its model relies on ever-expanding accumulation of data as recorded on the platform, supplemented by additional information that is not captured by digital means.

Most discussions surrounding the development of digital finance in China have focused on the improvement of technology and economic returns. But it is also important to note that the application of digital technology in rural areas has far reaching implications beyond immediate economic factors and technical capacity. More thought needs to be put into the ethical, legal, and regulatory concerns surrounding the rapidly expanding digital financial ecosystem. Indeed, the fast development of digital financial technologies poses distinct challenges for financial regulators, law makers, and the general public in China and beyond.

7. Conclusion

This paper has examined the dynamics of China’s emerging rural digital financial system. It begins by outlining the history of rural finance in China before looking at the ways in which the digital finance boom has fundamentally changed the rural financial landscape. It then goes on to look at how two Internet giants – JD and Alibaba – have respectively attempted to extend digital financial services to rural areas and people in their quest to create an integrated market, logistics, and financial ecosystem. This is followed by a discussion of how this rural digital financial push has been framed and perceived, and an analysis of the implications of this rapid digital financial expansion. The paper argues that digital financial inclusion and integration into the e-commerce market has had some beneficial outcomes for rural people and companies; but it remains an open question as to whether these benefits will lead to the improvement of rural society as a whole, and it certainly poses new and significant challenges on various fronts.

Focusing on two of the most high-profile attempts to financially and economically include the Chinese countryside in the digital finance system, this paper represents an initial exploration into what digital financial inclusion means for rural China. However, China’s fintech landscape is both varied and rapidly changing, meaning it does not easily lend itself to generalisations or static descriptions. Moreover, the extension of digital financial services has been uneven across the country, both in terms of coverage and operational models. As such, there is a need for future research that combines quantitative analysis with in-depth fieldwork in order to better understand the multifaceted and diverse socioeconomic impacts of digital financial inclusion across rural China.

Disclosure statement

No potential conflict of interest was reported by the authors.