On Feburary 22nd, the Credit Union, also known by its official name “Baihang Credit”, has finally received its business license from the government which is also the first individual credit checking license.
It was reported on September 20th 2017 that 17 companies involved in the consumer finance sector had a net profit of 974 million Yuan for the first half of 2017, which was approximately the total net profit for all of 2016. This explosive growth has caused growing concerns amongst regulators who are considering ways to implement a crackdown on the industry.
Since Chinese online micro lending companies Qudian and Paipai Dai have gone public on the New York Stock Exchange (NYSE), the government has been closely following the development of the micro-credit industry. Scrutiny has fallen not only their business model but also on their high revenue, which specifically caught people’s eyes. The Ningbo Jinzhou Financial Office already shut down two micro lending institutions. On November 21, 2017, the General Office of the State Council issued an urgent notice on suspending approval on the establishment of internet small loan companies. With the arising attention around financial risks, could this be the end of the industry?
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.
In August this year, WeBank announced that its lending product “Wei Li Dai” (WeChat Loan) has exceeded RMB100 billion (USD14.7 billion).
An efficient credit checking system is critical for the development of retail financial services. But in China, the individual credit system is not as advanced as the ones in US or Europe with the People's Bank of China (PBOC) credit system covering only about 25% of the entire Chinese population. The lack of credit investigation system creates a major issue for the risk control process of the financial services, especially on the inclusive finance side.
China has been at the vanguard lately when it comes to p2p lending, and even though there has been new-found focus on the risk of p2p and the creation of the Fintech Committee meant to regulate Fintech in China, companies keep developing and implementing new models that are cutting edge and in process of revitalizing markets that have barely been touched due to their inherent risk, and in the process of doing so, they have come up with successful business models that have excellent prospects of development.
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.