Understanding China’s fintech sector: development, impacts and risks

Abstract

Financial technology (fintech) is rapidly transforming the economy as well as the financial landscape in China. This paper attempts to shed light on its contributing factors, current state, economic impacts and potential risks. We identify three key drivers for China’s fintech development, namely shortage of supply in formal financial market, strong government support for promoting financial inclusion through digital technology, and more ‘tolerant’ regulatory environment. The greatest value of the Chinese fintech sector is promotion of financial inclusion, enabling a vast number of small- and medium-sized enterprises (SMEs) and low-income households to access to financial services. Existing studies unveil some strong evidences of fintech development improving efficiency, increasing employment and supporting entrepreneurship. In the meantime, there are also serious challenges facing this sector, such as regulatory uncertainties, illegal transactions, data abuse, etc. We conclude the paper by presenting some key takeaways, including several lessons for financial regulation.

KEYWORDS:

• Financial technology
• financial inclusion
• financial stability
• China

JEL Classifications:

• G20
• G29
• O16

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

1 This information was obtained through authors’ direct communication senior executives of these three online banks.

2 Ant Financial Services Group is affiliated with the e-commerce giant Alibaba, owns Alipay and is also a sponsor of the MyBank. Tencent started business in online games, but it is widely known for its social media service WeChat, on which it also built WeChat Pay and sponsored the WeBank. Baidu specializes in search engine in Chinese texts, owns a financial arm, Duxiaoman, and also formed a joint venture bank, Baixin Bank, with Citic Bank. JD Digits is affiliated with the e-commerce giant JD and owns numerous financial licenses.

3 In the Chinese context, the terms ‘internet finance’, ‘fintech’ and ‘digital finance’ all have similar meanings, though the official documents normally use ‘internet finance’.

4 According to definition of FRI, 1 indicates completely state-controlled and 0 indicates completely free market (Huang and Wang 2011).

5 HU Huanyong elaborated first presented the idea of this HU Huanyong Line in the journal article ‘Distribution of China’s population’ in Journal of Geographical Sciences (in Chinese) in 1935.

6 Notice for public consultation ‘On temporary management methods for commercial banks’ online lending’. http://www.moj.gov.cn/government_public/content/2020-05/09/657_3248297.html (Chinese government’s official website).

Additional information

Funding

Research for this paper was supported by the National Social Science Foundation of China [No. 18ZDA091 and 19BJY252].