Huang Yiping: China’s Inclusive Finance in the Digital Era

1、The development of digital inclusive finance in China: Rapid advances come hand-in-hand with new issues

   Current efforts to develop Internet finance stem from a desire to expand financial inclusivity. Governments are committed to establishing their own domestic inclusive financial systems. In China, for instance, existing policies in favour of policy banks, small-loan companies, etc., have provided great support for SME loans. More recently, the great progress and increasingly vast applications of Internet technologies has led to opportunities for lower acquisition costs and the simplification of risk pricing.

   Pivotal in this issue is the fierce debate concerning whether Internet finance can develop quickly in China. I believe there are three main reasons why it can.

   Firstly, services available to the general public and SMEs are in shortage in traditional financial systems. Secondly, the progress of digital technology can help alleviate problems caused by asymmetric information. Intelligent Mobile Terminals have proved the greatest revelation in this regard, but the impact of Big Data Analysis has also been considerable. The third and final reason is that relatively loose regulatory frameworks governing Internet finance have provided space for its development.

Recent indices published by the Chinese government show just how rapidly China’s Internet finance has developed. We can draw three meaningful conclusions from the information these figures provide.

Firstly, the rate at which China’s Internet finance has developed has been more-or-less doubling annually since January 2004. Secondly, there are regional discrepancies in this development. Coastal regions have enjoyed the fastest rates of development, whilst regions further inland have lagged behind. Additionally, each city’s level of development seems inversely proportional to its geographic distance from Hangzhou; substantiating its reputation as China’s capital of Internet finance. Thirdly, the main proponents of Internet finance have hailed mostly from younger generations – predominantly those born in 1980s and 1990s.

Peking University’s own index also makes for interesting study. The significant leap from 40 in 2011 to 220, just four years later in 2015, shows a dramatic rise in financial inclusion. Disparities between individual cities have also been narrowed: the direct result of targeted work on less advanced areas. This is a good reflection on the values propelling inclusive finance.

An inclusive financial system is yet to be established. In terms of business development and inclusion, online payment performs best when accompanied by online loans. Their development benefits from Intelligent Mobile Terminals, which connect potential markets, and Big Data Analysis, with potential that far exceeds more traditional, man-powered survey methods.

Although digital technology has provided new prospects for the development of inclusive finance, the road to a fully operational inclusive finance system is still laden with obstacle. To name just two: the lack of inclusion, and high costs of individual financing. Furthermore, digital technology is still not precise enough, and leaves much to be desired in certain fields and applications. More serious issues are posed by those companies who, despite having no data, or not knowing how to analyse it, are also engaging in Internet finance. In addition, inclusive finance also poses high risks from a regulatory perspective. China’s efforts to regulate inclusive finance are still in their preliminary stages. Reasonable thresholds not being set in some fields has resulted in relative chaos, while required licenses are yet to be procured in others. There is still room for further improvement, therefore. How we tackle these problems is key, and is of pivotal importance for Internet finance’s future.

2、Five thoughts on the existing regulations

Firstly, is a unified standard and framework required for the regulation of both inclusive and traditional finance? Quite simply, yes. Finance always tends towards integration and collusion, so for as long as traditional finance sectors still incorporate Internet finance in their business, the divides between them will gradually narrow. Therefore, we cannot establish separate standards or frameworks for each. Concurrently, however, if standards and frameworks are unified, another problem arises: regulatory departments will not have sufficient motivation or means to enforce the same degree of regulatory severity on inclusive finance as is currently afforded to traditional finance systems.

Secondly, how will current sector regulations be affected by this shifting financial landscape? Sector regulations currently dictate that the Central Bank should handle payments, China’s Banking Regulation Commission handle online loans, China’s Securities Regulation Commission take responsibility for investments, and that China’s Insurance Regulation Commission take care of Internet insurance. However, when the multi-functional nature of most Internet finance platforms are taken into account, it stands to question how these sector regulations will fare.

       Third, traditional sector regulations may not be suitable for use in internet finance industries; especially when multi-functional capabilities are so widespread across online platforms. Regulations for individual functions seems a more logical step. Where do the funds go after they are payed into these online accounts? Regardless of whether funds go towards repayment, investment, loans, or insurance, there are still issues to be addressed. Although digital technology usually helps alleviate information symmetry, issues still arise from the inaccessibility of information explaining where these funds are sent. Clearly, therefore, functional regulations are of huge importance.

Fourth, do we need to set admittance thresholds for internet finance platforms, including information intermediaries? I believe current arrangements should suffice, as long as regulations cover businesses’ financial trades with both financial and information intermediaries, as both pose similar financial risks. For example, although investment banks are information intermediaries, their admittance thresholds are usually capped at figures lowers than other financial institutions.

Lastly, how do we strike a balance between sharing information and maintaining security of information? Both are equally as important. On the one hand, digital inclusive finance requires large quantities of data; indicating the necessity of a relatively open information system. Digital inclusive finance simply could not exist without such a system in place. However, some degree of privacy and security of information is also essential. This balance may well require the collaboration of the public, individual agencies, and regulatory departments to achieve. At present, we still lack a highly efficient, wider-reaching nationwide credit information system. Until this is established, digital inclusive finance will struggle to evolve.