The long-awaited internet finance regulations offer ambivalent support to the booming third-party payment industry, and qualified tolerance of P2P. Financial stability and state bank interests will remain the final arbiter.
In a year of state-led effort to digitise and upgrade the Chinese economy, PBoC and 9 other agencies laid out a basic law for internet finance on 18 July. The law divvies up regulation of anything that might be considered internet finance between its cosignatories, striking a conciliatory tone with the industry and reaffirming state support for e-commerce. With uncharacteristic speed, PBoC, CIRC and CSRC have already released supplementary regulations. But many more must follow before a clear picture emerges.
The document aims to
- reduce risk: lay a comprehensive framework, then assign a lead agency to regulate it; place vehicles implicated in the mid-2015 stock market crash—that, like P2P, raise funds for margin trading—under scrutiny of the banking regulator
- clarify definitions: the scope of internet finance was previously delineated by market research reports, but was undefined as a regulatory category
- place internet finance solidly within the banking system: ‘internet’, meaning the technology infrastructure, subservient to ‘finance’ as a policy sector
- channel internet finance to fill gaps left by traditional banking that constrain economic growth, particularly ability of SMEs and consumers to secure loans. At the same time growing rural economies via expanded e-commerce
- encourage integration of internet finance within capital markets, above all seeking to drive equity market growth both by expanding access for retail investors and increasing listed tech firms on both exchanges and the NEEQ
- decrease policy uncertainty for smaller firms contemplating market entry, but deterred by risks of the ill-defined regulatory environment
- establish guidelines for regulators to balance spurring innovation with protecting the market share of state banks
who regulates what?
National-level documents promoting internet finance have increased more than twofold compared to 2014.
banking on the internet for the future
- policy support for e-commerce has risen rapidly: given dwindling manufacturing growth, the state looks to rural entrepreneurship to solve labour oversupply, and tap a new consumer base. Internet finance provides the financial infrastructure
- internet finance can also break through the geographic boundaries of traditional microfinance in rural development and poverty alleviation
- legitimacy of the traditional banking system will however be reasserted. Some areas, including third-party payment and P2P will be more strictly regulated, on grounds of risk. PBoC’s supplementary third-party payment regulations impose tight security controls on daily non-bank transactions above C¥5,000; the regulations themselves require P2P platforms to entrust funds to banks
- this supports easing financing channels for consumers and smaller private enterprise, hitherto neglected by the traditional banking system, but does not disrupt state banks’ profit model or threaten liquidity
- the regulations seek to map an existing regulatory structure, that developed around a much less sophisticated financial system, to a complex and rapidly evolving industry
- part of the reason for the rise of shadow banking and excessive leverage in the stock market is responsibility vacuums between regulators. The regulations address this through exhaustive assignment of responsibility, but involvement of ten agencies may only exacerbate coordination difficulties
- big data: a key obstacle in developing a thriving consumer credit industry is ability to appraise loan risk. To this end, state encouragement for big data development will assist collection of credit history data. In practice, this is a chicken and egg situation: banks cannot assess the risk of, and do not want to extend loans to, consumers without credit history. But consumers cannot build a credit history without taking out loans.
- As always, a gauge of implementation is how quickly agencies carry out their part, and provinces formulate their own guidelines. PBoC, CIRC and CSRC have already released follow up documents; Zhejiang, Shanghai and Shenzhen had pre-released policies encouraging Internet finance industry development
24 aug 2015: PBoC suspends Zhejiang Yishi’s license, on grounds it mismanaged clients’ deposits and information fraud: first case under the new regulations.
7 aug 2015: CSRC launches investigation into online crowdfunding platforms.
31 july 2015: PBoC’s strict third-party payment draft rules prompt cries PBoC is squeezing the industry in favour of state banks. Adding insult to injury, PBoC notes consumption will not be affected, since online shoppers can use state banks’ third-party payment platform. Internet finance share prices tumble the following week.
27 july 2015: CIRC issues ‘Internet insurance supervision interim measures’, aiming to expand online insurance products and rein in third-party platforms.
18 july 2015: Internet finance regulations released.
16 apr 2015: CSRC Zhang Yujun 张育军 CSRC says securities industry will reduce barriers to entry for internet companies
27 dec 2014: PBoC increases scope of financial products that must hold deposit reserves to include third party payment investment funds like Yu’ebao, but for the moment does not raise reserve requirements
5 may 2014: PBoC statistics chief Sheng Songcheng 盛松成: internet finance must meet the same reserve requirement ratios RRR as banks. Yu’ebao’s returns may then drop by 1 percent, narrowing its advantage over other wealth management products
mar 2014: domestic media reports CBRC, CSRC, CIRC, and MIIT also involved in drafting regulations on internet finance
13 mar 2014: PBoC suspends Alipay’s offline QR code payment service, and Tencent and Alipay’s virtual credit card services
11 mar 2014: draft Guiding Opinions on mobile payment service cap single transactions C￥1,000 and annual total at C￥10,000. Enacted version (April) less strict
feb 2014: Major banks, fearing a liquidity crunch, start capping transfers to Alipay. WSJ reports PBoC leading government effort to lay down internet finance regulations
jan 2014: Yu’ebao assets reach C¥250 million. Overtakes China Asset Management Co as nation’s largest fund
june 2013: Ant Financial, Alibaba Group’s financial arm, launches Yu’ebao, a money market fund pooling balances from Alipay (Alibaba’s third party payment platform), and investing mostly on the inter-bank market through Tianhong Asset Management
Wang Xinrui 王新锐, Guo Junlei 郭君磊 | FT Chinese
The Guiding opinions are primarily orientational, intimating the future direction of state support for the industry. Particularly notable is that e-commerce, while subsumed by internet finance, is treated as a separate policy category, indicating its newfound primacy in state planning. While state planning increasingly views internet finance as a policy tool to bring banking to those left out, rhetorical support is not matched by actual safeguards to ensure industry development extends financial inclusion. Important to watch in the future are challenges for the industry that the document neglects or leaves for supplementary policy to define: establishing privacy, transaction security and cyber security standards, protecting consumer rights, and ensuring information transparency.
Ma Mingzhe 马明哲 | China Business News
The Guiding opinions, in caging riskier lending and fundraising practices and setting clear policy goals for industry development, should throw cold water over hype that internet finance is an untapped gold mine. Banks’ profit margins have shrunk in recent years, and the internet serves a tool to increase efficiency and reduce transaction costs while increasing middle-income customer base. But this is merely expanding at the margins; there are no windfall profits to be made. From a regulatory perspective, the important step is requiring licensing for companies participating in Internet finance.
Jin Yongbo 金雍博 Wei Xulong 魏旭龙 Meng Shangjie 孟尚杰 | Tencent Dayu Financial Think Tank
The Guiding opinions bring a lot of grey areas into light, but it is still too early for a verdict. Many follow up regulations are needed, and at the same time, many facets of the industry are still young and amorphous. In some cases more information is needed before effective regulation can be put in place, while in others, industry development is waiting for clearer regulation. P2P regulations, for instance, should be general. The infantile sub-industry is undergoing a fundamental shift from competing on marketing and financing channels to asset quality, so it is too soon to codify detailed regulations. Encouraging Internet finance companies to list however, is unlikely to make substantial progress without clearer guidelines for listing.
in the spotlight
People's Bank of China 中国人民银行
Spearheading formulation of internet finance regulations, PBoC strikes a balance between encouraging innovation versus insulating state banks. It set the tone for the internet finance regulation in its reponse to Yu’ebao. After Alipay’s money market fund caused a liquidity crunch in the interbank market in early 2014, state commercial banks began fighting back by capping transfers. PBoC stepped in, silencing calls to shut down the fund but constraining its use as an investment tool by limiting daily transfers to third party payment platforms. Currently researching how to increase rural access through encrypted SMS.
Ant Financial 蚂蚁金融服务
Alibaba Group spun off its financial arm, best known for third party payment platform Alipay, in 2011. With a user-base three times that of paypal and given the breadth of Alibaba Group’s e-commerce platforms, the two are practically a separate central bank and economy, respectively. Although the dramatic decrease in interest rates has compromised the viability of its money market fund Yu’ebao, Ant Financial will stay at the cusp of innovation in internet finance. Following Tencent’s Webank, Ant is a major backer of digital Mybank, debuted in June. In August it launched Ant Fortune, a wealth management product that connects Yu’ebao to other investment funds—900 and counting—through its partnership with a local brokerage. It has its eyes set on allowing users to invest in the stock market directly. CSRC would have to grant it a brokerage license first.
Cyberspace Administration China 国家互联网信息办公室
Xi has sidelined traditional propaganda organs through the cyberspace administration. CAC activities show China’s awareness of the poor PR image its internet controls have engendered abroad, from its role in launching a new Huffington Post-inspired state mouthpiece The Paper 澎湃新闻, to director Lu Wei 鲁炜 meeting Mark Zuckerberg in Silicon Valley. Behind the scenes, the agency’s direct line to Xi represents cyber security’s central place in Xi’s security strategy. Its inclusion in the group serves as a bold reminder that for China’s central government, national security includes financial technology.
in case you missed it…
cp.positions—audit of shifts across policy sectors
end september: SOE reform, command economy lives on
mid september: lining up behind the chief
Copyright © 2015 China Policy, All rights reserved.