Risk & Compliance

Is China Stepping Up Fintech Regulation a Good Thing?

As developments in fintech continue to emerge, Chinese regulators have become increasingly worried about finance being overshadowed by technology.
Lauren MuskettDecember 14, 2020

Fintech has spread throughout China extensively over the last few years. But for the most part, it’s also gone unregulated. Recent investments in this field have accelerated its growth, with some fintech banks reaching values of several billion dollars.

As developments in fintech continue to emerge, Chinese regulators have become increasingly worried about the rate at which finance is being overshadowed by technology.

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The full extent to which these concerns will stretch has yet to be seen, but new regulations have been introduced by Beijing to reign in fintech giants.

Fintech Has Thrived in China

Technology has become increasingly mixed with other industries in the last few years, resulting in entirely new fields like fintech. These companies have seemed to thrive in China more so than in other countries.

This has been somewhat surprising considering China is known for being stricter with regulations on outside tech companies, preferring to use proprietary technology instead. For example, in 2019, the Bank of China issued $2.8 billion worth of bonds in blockchain technology, yet alternative digital assets are banned in the country.

Examples such as this were why it was shocking to many that fintech was seemingly accepted by the Chinese government. Many fintech companies have entered the loan market in China, and their combined share of the market is beginning to rival traditional banks. With this increase comes added systematic risk.

As a result, China has naturally begun to impose regulations under the argument that they are for the safety of these companies and to reduce potential risk.

New Regulatory Actions

As the risks of fintech companies dealing in loans have grown, so too has the regulations imposed by China. Over the last two years, regulations have slowly been introduced, but recent actions by the government have taken those regulations to new levels.

Proposed rules have emerged in the Chinese fintech industry that would require online lenders to give up 30% of their loans that are funded with banks, which has the potential to throw a wrench into the business model of many companies.

This move was driven by the belief that, while fintech has improved financial services, it has not changed the nature of the industry. Officials in China believe that these companies need to be regulated by the same rules as traditional banks and lenders.

In a culmination of these new proposed rules, the Chinese government halted the IPO of Ant Group, one of the country’s largest finance companies. With this move, the seriousness of the government in their comments on regulating the industry has become clear.

Liang Tao, the vice-chairman of the China Banking and Insurance Regulatory Commission, was quick to comment on how this decision stemmed from the fact that the digitization of finance is still new to the country, and that regulations are to be expected to ensure the safety of the transition.

In fact, China is not completely alone. The European Union has begun revealing different protections and regulations for companies in tech, such as notifying government officials of a data breach within 72 hours. Unfortunately for many companies in fintech, these increased regulations are something they will need to adapt to in order to keep operating on Chinese soil.

Corporate and Global Impacts

As for Ant Group, the decision to halt the IPO process was a crushing blow of realization for the company. This decision was also surely a warning to other corporations that the Chinese government was tired of letting the industry grow unchecked.

In the past, China has preferred to hold as many cards as possible when it comes to tech companies. The country already owns half of all virtual private networks (services designed to encrypt data sent over public networks) and controversy surrounding the government’s involvement in companies isn’t new.

In fact, governmental influence over overseas companies has long been a point of contention between Washington and Beijing, and this recent decision may not sit well with fintech companies in the U.S. either.

This has led to regulations within the United States as well. Over the last few years, increasing data privacy regulations and laws have been imposed on tech companies due to a fear of influence from other governments on overseas companies operating on U.S. soil.

The U.S. government has since announced its support for a “Clean Network,” which means a crackdown on any malignant actors that could pose a threat to American networks, including the Chinese-owned telecommunications company Huawei and social networking service TikTok.

It is inevitable that technology will continue to develop and merge with existing industries. There is no avoiding this change. Regulators are having to grapple with the fact that regulations put into effect today may not carry the same weight in the coming years and may or may not halt progress.

Whether or not these new regulations from China are hampering this change or making it safer is yet to be determined.

This story originally appeared on Benzinga.

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