From a systemic perspective, it is hard not to see the potential risks posed by unregulated lending. Margin lending — both regulated and unregulated — has been widely attributed as one of the causes for the soaring stock market in China and the resulting drastic correction.
Some see the new supervisory measures (such as the limit on online and QR code transactions) as a way of maintaining the status quo and entrenching the interests of the state-owned banks. However, it is perhaps better understood as a way for the central government to better maintain control over the finance system, which is likely more important to the government than simply maintaining the state-owned banks' market share. For example, the government has been willing to issue new banking licenses to Internet companies such as Tencent to allow them to innovate.
What are the implications of a closer supervision on Internet finance by the Chinese government? Will it hinder fintech startups/non-financial organisations from entering the payments market?
It is likely too early to tell what the long-term impact will be. Already, we understand there is substantial pushback from tech and Internet companies on some of the proposed regulations, and there is also a question of how the regulations will actually be implemented in practice.
To some extent, further regulation is bound to reduce the number of new entrants, but this can also be seen as a way of heightening the quality of new entrants by making sure they meet certain requirements. The question, as always, will be if the bar is being set too high. The government may be making a conservative policy decision that it would rather set a high bar now to avoid unpleasant surprises and turmoil in the market, rather than set a low bar and run such risks.
One of the promises of fintech is that it can help solve some of the inefficiencies that exist in any financial system, such as by cutting out the middleman, and increasing information parity among market participants. But some of the existing inefficiencies in the Chinese financial system also serve as important policy goals. For example, there are several US and European fintech startups that are allowing cross-border currency transfers to occur at better rates and lower fees than traditional bank transfers. But because of China's capital controls and regulations — which are important for China from a policy perspective — Chinese consumers are unable to participate in such innovation at this time. So to some extent, yes, it's quite possible that because of increased regulation innovation in and development of fintech in China may be slowed. But the Chinese government is also aware that hindering fintech startups, or effectively only allowing state-owned enterprises to flourish in new payment systems, will ultimately be detrimental to China.
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