From November 11th night to 12th, 2016, Institute of Digital Finance of Peking University (short for IDF) held its first annual conference focusing on “Inclusive Finance in the Digital Age”.

The picture shows the site of the annual conference

 

Peking University’s Institute of Digital Finance Holds its First Annual Conference

 

From November 11^th-12^th, 2016, Peking University’s Institute of Digital Finance ( IDF) held its first annual conference, focusing on “Inclusive Finance in the Digital Age”.

 

At the conference, the IDF published three research reports. First, a research report on “Digital Technology to Promote Inclusive Finance” (hereafter ‘Report 1’) was presented. Report 1 was commissioned by the International Department of the Bank of China, and conducted independently by the IDF research group. Report 1 summarizes digital inclusive finance’s current uses in China, as well as providing analysis of the universal problems and risks the industry presents; concluding with corresponding countermeasures.

 

That night, Director of the IDF Huang Yiping, as well as other members of the research group, delivered speeches on this report. Experts from the Bank of China, Tsinghua University, Zhejiang University, and other institutions engaged in a heated discussion on those topics covered by the report.

 

According to Report 1, the evidence provided in Peking University’s Digital Inclusive Finance Index fully demonstrates the value of digital finance. The index has increased from 40 in 2011 to 220 in 2015 – an annual increase of 53%. The provincial index shows large regional disparities which are rapidly smoothing out. This information is further substantiated by the sub-indexes for cities and counties.

 

However, there still exist many imperfections in China's digital inclusive finance system. Report 1 analyses the difficulties encountered in the development of digital inclusive finance in China. Firstly, digital inclusive finance is not quite "inclusive" enough; secondly, digital technology needs to be better understood and utilized by individual companies; third, existing regulations either fail to set appropriate thresholds or deny the relevant licences to those that need them; fourth, the digital inclusive finance sector is still fraught with a a high degree of risk, for various reasons; fifth, digital security is vulnerable to cyberattacks; and lastly, China lacks a highly efficient, wide-ranging national credit information system.

 

According to Report 1, most problems within digital inclusive finance arise from a shortage of information, or improper supervision. To ensure the healthy development of digital inclusive finance, an effective regulatory framework must be established as soon as possible. However, it must be stressed that these regulations must not impose a suffocating degree of supervision, but instead toe a cautious line between innovation and risk.

 

How should this regulatory balance be achieved? Report 1 provides the following recommendations. 1) To set uniform regulatory standard and framework. 2) To implement comprehensive and functional supervision. 3) To set up appropriate thresholds and withdrawal mechanisms. 4) To establish an appropriate standard for disclosure of information. 5) In keeping with the times, to adjust legal supervision policies. 6) To improve and unify existing open credit information systems. 7) To educate investors and therefore improve consumer protection. And, more generally, to carry out the above to a high standard, establishing an information security system strengthened by the philosophies of openness and collaboration.

 

On the morning of November 12th, Sun Tianqi – Chairman of the Global Partnership for Financial Inclusion (GPFI), and Deputy Director of the Consumer Financial Protection Bureau (CFPB) of the Bank of China – commended Report 1’s positive impact, promoting the further implementation of G20 digital inclusive financial principles in China. He suggested that, after executing said changes and expanding China’s horizons, the application of science and technology in financial fields could be reassessed. He also stressed the importance of behavioral supervision of online financial institutions. He concluded by reasserting the primary importance of eliminating the digital divides between different regions and groups.

 

Xie Xuanli, Senior Researcher at the IDF, then presented the research report “Analysis on the Strategic Online Transformation of Commercial Banks” (hereafter, ‘Report 2’).

 

Report 2 summarizes the current strategic reaction to domestic commercial banks’ introduction of online finance from three different perspectives: understanding, organisation and practice. Based on information collected between 2010 and 2014, Report II raises the following points:

1. From 2010 to 2014, the use of online finance by China’s commercial banks spread gradually inland from the eastern coastal areas, where it had already been widespread. However, this online transition is still witnessing its early stages, and many are yet to make the leap of faith.

2. In terms of understanding and making full use of online finance, online products, especially those relating to electronic banking, have been developing and popularizing most rapidly. Meanwhile, other financial products, such as those facilitating online financing, credit, and business, have been slower to get off the mark.

3. Organisations’ own efforts to adapt to this new digital era have generally lagged behind the innovation of new products. Clearly then, there is still work to be done in the establishment of new online institutions, the enrollment of new talent, and the encouragement of cooperation between banks and online companies.

4. In general, state-owned banks seem to be paving the way, but may struggle to maintain their early advantage. Other trends show the rapid development of joint-stock banks, and a rift between small- and medium-sized and urban and rurally based banks; the latter usually enjoying the more significant growth. Average growth is adversely impacted by great incosistensies among the field.

5. Some privately owned small- and medium-sized banks have bettered better-known larger banks in certain regions; simply because they are winning the race to transition. Among those joint-stock banks, China Everbright and Minsheng have developed the fastest, despite China Merchants’ Bank’s early promise. The Industrial and Commercial Bank of China is now being presented as a model for the online transition of state-owned banks.

6. The specific strategies used by commercial banks in their online transitions are categorised as followed: leading strategy, centered strategy, lagging strategy. Each of these are subdivided into both theory and practice. Issues are currently listed under the title ‘organisational deficiencies’.

Report 2 points out three main issues existent among commercial banks: general complications and difficulties in making the digital transition, a lack of depth and thoroughness of information, and a high product similarity across the market. Report 2 proposes three focus points to counter these issues: the strengthening of cooperation between online companies, the reformation of commercial banks’ business processes, and organisational cohesiveness.

Li Lihui – a member of the NPC’s Financial and Economic Committee and former Chief Executive of the Bank of China – suggested that the research group carry out a second round of research, in order to provide some more in-depth analysis. This further research should involve a focus on banking costs, and the experience of banking clients。

In quantitative analysis of Peking University’s “Internet Financial Sentiment Index”, the application of behavioral science in online finance was both introduced and debated, arousing a wide-range of opinions from those in attendance. Although the development of Internet finance can currently be measured through careful analysis of numerical data, there is no such system of analysis for data arriving in more abstract forms, such as news reports.

In an attempt to rectify this neglect of data in different forms, the Institute of Internet Finance (IIF) – through a number of methods – analysed nearly 15 million news reports, and compiled their own “Internet Financial Sentiment Index” (hereafter, ‘the index’). The index covers data from January 2013 up to September 2016. Wang Jingyi, a PhD student at PKU’s National Development Institute, had the honour of presenting the index to his peers.

This first project of its kind in China, the index is indicative of a new trend towards online innovation. The index itself shows a gradual rise in attention payed to online finance from January 2013 up until the beginning of 2016, where attention spikes sharply downwards. Also of note is a considerable boost in interest

following the publication of guidance on Internet finance in July 2015. Despite the recent downwards trend, interest remains close to the average level across the recorded period.

Looking at the data th index provides on interest shown to specific business sub-categories of business also provides interesting study, but can we really draw any link between the data the index provides and development trends? If we cross-reference the Internet investment and development data from PKU’s “Internet Financial Development Index” and data mapping the level of attention shown to P2P in the “Internet Financial Sentiment Index”, a convincing degree of correlation can be observed. From the beginning of 2014, the two graphs follow much the same pattern. Although 2015 witnessed more points of inflection, both graphs remained largely in-synch; most notably during periods of rapid change in December 2015 and February 2016. However, any suggestion of genuine correlation between these phenomena must still be made with caution.

It is expected that PKU will publish all coding used in production of these indices, and welcome future collaboration with other interested parties.

Xu Zhong – an inspector of the Financial Market Division of the People's Bank of China – fully affirmed the academic value of the index, and offered suggestions for its improvement. He asserted the importance of establishing a scientific and systematic index to China’s financial market. He also recommended that the research group apply the index to the wider financial market as well as online finance.

The meeting was hosted by PKU’s Institute of Internet Finance and Shanghai’s New Finance and National Development Institutes. During the meeting, experts of Internet finance from political, business-related and academic fields launched a lively discussion on topics such as China's Internet wealth management, reforms and challenges posed to the P2P industry, the compromise between innovation and risk in the supervision of Internet finance.