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China Banking Research

Opening a completely private commercial bank with no government ownership is not a suitable choice in every country. In some countries, like the US, private commercial banks play an important role in their economy and provide loans to small and medium enterprises. However, in Indonesia, the government allowed private commercial banks in the 1980s and it turned out to be a failure. Founders used the banks as a tool to collect money, and invested in real estate in order to profit, at the cost of a serious economic bubble.

China Fintech has been developing rapidly. According to an EY report, in 2016, China's fintech industry attracted US$8.58 billion in investment, the highest in the world. However, while the UK's fintech regulatory sandbox became a case-study for governments globally including Singapore and Australia, there is still a big blank in China. For example, China's P2P industry developed without any regulation since it started in 2007. The government only started monitoring the industry in 2016, after serious criminal cases which caused social panic happened.

Recently, there has been a rise in Chinese internet giants investing or collaborating with banks. This year alone, some of China’s largest internet companies – Baidu, Ant Financial, Jingdong Finance, and Tencent – formed strategic partnerships with some of China’s biggest banks. All these companies, while being competitors, have risen to be at the forefront of the FinTech movement in China in recent years. Therefore, collaborating and partnering with these powerful banks give the companies a head-start in this developing market.

While no official steps have yet been taken, the People’s Bank of China (PBOC) in Beijing has raised the possibility of a regulatory sandbox environment for future ICOs as the government works through its options for potential regulations, focusing on providing a legal framework for Initial Coin Offerings in China (ICOs) moving forward. In addition, options such as investor education, project review, and increased information disclosure have been mentioned as targets for a new framework. The PBOC’s previous emphasis on Anti-Money Laundering (AML) and Know Your Customer (KYC) protocols are also expected to continue with ICO regulations. Other potential regulatory possibilities include requiring companies to have a working product before their ICO, requiring more information disclosure including risk and investor assessments, and reducing speculative investments.

As China's FinTech industry, led by Tencent and Alibaba, has exploded in recent years, regulators have been watching the industry’s growth carefully, in order to manage risk and protect consumers while still encouraging growth and innovation. In May 2017, The People’s Bank of China (PBOC), the country’s central bank and main regulator, announced the creation of a FinTech committee under the PBOC’s Technology Department to research the impact of the sector on financial markets and China’s monetary policy. In addition, the committee will also act as a coordinating body for the PBOC, as well as research and promote the implementation of regulatory technology (RegTech).

There is a big blank space on individual credit scoring in China. The national individual credit reporting system was founded in 2005 by the Credit Reference Center, a part of the People's Bank of China (PBOC). But at the end of 2015, only 870 million individuals were included in the database, and only 370 million people’ credit history was in the system, covering just 26% of the whole population. On Jan 5th 2015, the Chinese government authorized 8 companies to prepare their own personal credit scoring platforms. One of them, Sesame Credit, is owned by Ant Finance and is the largest platform, but remains unlicensed.

Yu’E Bao, the world’s largest money-market fund, may have to limit its individual investment amount at RMB500,000 (USD$72464), which is half of the amount the limit is now. The implications aren't for certain at this point, but it could mean the end of the platform's growth in the future. 

A press announcement on April 10th 2017 showed that Tencent, a Chinese online giant, led an investment in India’s electronic commerce company Flipkart, alongside eBay and Microsoft. The total amount was $1.4 billion and Tencent contributed $700 million, eBay $500 million and Microsoft $200 million. This was the first investment for Tencent into India’s e-commerce market. But the question remains, will it be a good move for the company?

In the last year, Panda bonds (the name of mainland RMB denominated bonds from a non-domestic issuer) have become increasingly competitive and attractive for investors. What explains the increased usage of inland bonds in contrast to slightly diminishing performance of the Dim Sum (RMB denominated bond issued abroad)? How do we define the current interrelationship of the two. And what is in store for the future of the Chinese bond market?

Nothing is easy in the banking industry, and it's getting tougher in China. The Chinese central bank (PBOC) used to control banks’ lending and deposit interest rate by setting high and low limits, as the top line and bottom line in the chart. If a bank in China can always lend/borrow at the limit rates, the margin would not change much over the years. However, the story is not that simple.

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