by Professor Simon Deakin & Boya Wang, Centre for Business Research, University of Cambridge
New research from the Centre for Business Research, University of Cambridge, looking at the growth of Fintech in China and its implications for the UK economy is shedding light on how access to internet finance and credit is helping to fuel China’s growth in domestic consumption and what protections are offered to companies and customers in this rapidly changing environment
In a new two-part podcast Simon Deakin, Professor of Law at the University of Cambridge, and Director of the CBR and Senior Researcher Dr Boya Wang, discuss with CBR Policy Associate Boni Sones the importance of their research.
They talk about how their interview-based fieldwork with businesses, banks and regulators in China is giving them new insights into why and how Fintech has grown, and what the implications for the global North are.
In Part One Professor Deakin and Dr Wang look at how Fintech in China is regulated and the impact it is having on business growth and consumption. They also look at the risks involved to businesses and consumers, and the protection of consumer data.
In Part Two Deakin and Wang discuss further what is being done to protect consumers’ privacy and data, what happens if there is a default on a loan, and what lessons the West can learn from the inroads China is making in Fintech and its fast growth there.
Part One key quotes:
Deakin: “Fintech means internet related finance. It has seen a great expansion in China with a very large number of peer to peer lending platforms coming into existence. Some very big companies in China including Alibaba and Tencent are also playing a major role in this. They are involved in messaging services and developing big data analytics for use in credit rating and for evaluating borrowers for the purposes of loans to companies and for consumer finance. There has been a huge increase in this Fintech activity recently and China has to some degree a protected internal market, it is more difficult for overseas companies to come into their markets, so they have large corporates like Alibaba and Tencent but also a very large number of small platforms. China is rapidly becoming the global centre for Fintech.”
“The Chinese government has heavily supported the development of Fintech. It has engaged proactively in a number of ways building up science and technology in the University sector, encouraging spin offs and venture capital funding and encouraging the commercialisation of University research in areas like the Pearl River Delta. “
“In some senses the regulation of internet finance and internet data is less restrictive in China than it would be in the global North and this may account for the exponential growth of the Fintech sector over the past five years.”
“In China lending was traditionally the formal-sector state owned banks lending to larger companies, often state-owned, , but this is still a small segment of the overall market, say 20 per cent. Most lending happens outside this formal sector but that doesn’t mean it is outside the scope of legal rules entirely. Informal lending from peer to peer or family or friends still goes on in some parts of China and this can be fragile as we saw in the crisis in Wenzhou in 2011. ”
“Fintech is in some senses an evolution out of informal finance. It is mostly taking place outside the formal or state owned sector. ~It is important for ensuring small firms get access to credit which was previously rationed. It is still informal, it is dynamic but it is not completely regulated so there are issues around systemic risk and issues around data protection which are only partially covered by existing regulations in China.”
“Fintech does raise some difficult questions such as whether platform loans should be underwritten by larger banks and insurance companies to ensure that the risk is shared out . Fintech isn’t unregulated it is regulated differently from the formal sector for the most part.”
“Historically peer to peer lending has often been associated with illegal fund raising or illegal saving absorption in China. Chinese SMEs are faced with very limited access to bank credit. The government has ignored the impact of peer to peer lending in stimulating domestic demand so more regulations and administrative measures are being implemented so the legality of this sector is being increased.”
“Fintech services have relatively simple application and scrutiny processes compared to the traditional formal banking system. But there are limits, so the role of Fintech in helping start-ups has been limited because governments can’t control or monitor the direction of the funding, allocation or uses. They were concerned about the misuse of the money, such as money laundering and housing speculation. The role of Fintech in helping business start-up has been very limited. “
“Over the past few years the Chinese e-commerce industry has grown significantly. In 2016 the transactional volume of the online retailing industry was almost 35 per cent of the global online retailing, and there is now an abundance of data, which helps the fast growth of the Fintech industry. This helps companies like Alipay, Tencent and Jingdong develop the credit worthiness of their customers.”
“We are moving to a more streamlined big data analytics system of giving loans which reduces transaction costs but everything now critically relies on the effectiveness of the algorithms used in big data analytics and the systems are not completely understood so it is not clear how far this is high risk. There is a systemic risk issue and we don’t know if this new big data analytics approach is more risky or not and we won’t know until we have been through one whole turn of the credit cycle. We haven’t been through a boom and bust cycle with this yet. “
“Chinese lending has been based on informal lending and trust and this hasn’t been lost with the move to Fintech and maybe this makes itchinese Fintech distinct and different from Fintech elsewhere.”
“The privacy concern is increasing in China given the personal data stock of e-commerce giants. There are now millions of customers with their data in the hands of e-commerce giants, more than SOEs previously held. Personal data is being shared and the privacy issue is a growing concern. Legal development is still lagging behind the industrial development but there are more regulations and administrative measures being adopted now. “
“Alibaba or Tencent are merging a number of different functions and they can use their transactional data more easily than in America or the UK, where data protection is a huge issue too. Do AI analytics result in discrimination against certain vulnerable groups or mis-descriptions of credit risks? This is bound to be an important issue everywhere. The trading of data, and global data trading, makes data a commodity . It is too soon to say what sorts of regulations we will be seeing and whether or not we can control the use of our data as consumers and users of internet services but this is a huge area now for the law.”
Part Two key quotes:
“Regulations effecting platforms in most countries have sector specific rules and that is true in China. A lot of the time Fintech is just a name which is given to forms of lending which may not be fundamentally different from those we are familiar with from existing practices. Many of the regulations apply to Fintech as they would apply to anything else like banks and any other forms of financial provision.”
“Consumers in the UK are protected. The Financial Conduct Authority has a range of powers to protect consumers, like the Sandbox which allows firms and the regulator to learn about new Fintech technologies. Companies and regulators in China are now looking at this too.”
“The regulation and supervision of the Chinese Fintech industry requires the co-ordination of all the various regulators in China and between the central policy makers and the local government so there are strong Chinese characteristics.”
“It is very difficult to give an exact assessment of the economic growth in China contributed by the Fintech industry. Based on our interviews many of these lending platforms mention the important role of Fintech financing in stimulating domestic demand. This is one of the reasons why the Chinese government is concerned about the systemic risk accumulated in the sector but on the other hand they maintain support to the industry given its instrumental role in stimulating domestic demand.”
“China is leapfrogging certain aspects of financial and technological development in the global North and in that sense may soon find itself to have a competitive advantage compared to Europe and the US and that is because it is not constrained in the same way by existing models or existing regulations. This is an important development for the global economy not just the Chinese one. “
“The importance of the cashless society in China is growing but its actual affect in pushing China into a cashless society is yet to be seen.”
Deakin ends by saying:
“We will be completing our research in the next six months or so and we have already been presenting our research in China and we will be presenting at conferences in the UK soon.
“The research was a collaboration and co-funded by the British ESRC and the Chinese National Science Foundation and we expect that there will be interest in this line of research. We hope that it will be part of a longer term project looking at Fintech and looking at China’s economic growth and how that develops. “
Wang ends by saying:
“I was very surprised by the sophistication of the market and the Chinese Fintech market is becoming more differentiated and specialised addressing specific customer’s needs and this impacts on customers’ behaviours.”
Listen to the podcasts
In Part One Professor Deakin and Boya Wang look at what protections business leaders and Chinese consumers have in the law from offering and taking out Fintech loans through internet companies and what impact it is having on business growth, and consumption. They also look at the risks involved to businesses and consumers and the protection of consumer data.
In Part Two Deakin and Wang discuss further what is being done to protect consumers privacy and their data, what happens if there is a default on a loan and what lessons the West can learn from the inroads China is making in Fintech and its fast growth there.