Is the People's Bank of China internally synced on the future of China's financial industry?

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China’s economy is changing. Consumers have taken to e-commerce in a big way and have clicked and shopped their way to make China's e-commerce industry the biggest in the world. A key enabler has been financial reform, which has let the online and mobile payments industry grow and develop. Yet with the regulations of the past month, you'd be forgiven for scratching your head and wondering what the government had in mind...

According to the National Bureau of Statistics, Chinese consumers spent 760 billion yuan online in the 1st Quarter of 2015, a year-on-year growth of 41.4%. More astonishingly, this accounts for 35% of total global online sales. A key enabler has been the development of the mobile and internet payment industry.

Through a series of reforms in 2010 and 2011, the government opened up the payments industry to third party players through a licensing system. At first, internet and mobile payments grew slowly, but as the number of e-commerce options have increased, payments followed.

Although these payment systems were enabled through government reform, it seems like the government now feels like things may have gotten out of hand with third-party payment firms offering users services such as financing, wealth management or currency exchange, which are traditionally provided by banks.

To counteract this, the draft for the new regulations for the third-party payment sector was released on July 31st. Among the proposed regulations, there are transaction, daily and yearly limits for shopping and investment payments - although it should not cause much inconvenience for individual consumers according to the PBOC. In 2014, around 98.5 percent of Internet users spent less than 200,000 yuan on shopping or purchasing online wealth management products by using their third-party payment accounts.

Ironically, on August 28, in light of increasing investor fright, and to drive consumption and stimulate the economy, especially after the recent precipitous drop in the Shanghai market, the PROC announced cuts in the required reserve ratio down to 18% and in the interest rates to 4.6%.

So, there seems to be a slight contradiction among the Chinese government reforms that seek to enhance further development potential and safeguard financial risks. On one hand, the government is looking for tools to support economic growth and stabilise the stock market through banking reform, on the other hand, they are about to severely limit one of the key tools that has helped the economy grow over the past decade. 

Herein lies the key challenge for regulators going forward: how to enable economic reform and development while at the same time keeping the industry stabilised. Online and mobile payments create economic value, yet potentially also introduce risk for the banks who are gradually losing relevance. How they handle it will be critical for not only the financial industry, but the Chinese economy as a whole. 

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