The Future of Fintech in China

14 Apr, 2021 . 4 minutes

China is undoubtedly one of the world's most dominant fintech breeding grounds and its government is known for being supportive of the industry's development. The growth of the fintech industry in the country has also been mostly positive. Nonetheless, China's reputation has suffered due to the circumstances surrounding the emergence of the coronavirus. The subsequent pandemic has also raised questions over the future of the fintech industry in the country. At $25.5 billion, Chinese fintech deals accounted for 46 percent of global fintech investment in 2018. China's massive domestic financial market now has an estimated 87 percent of consumers using fintech services, while the country's mobile payment market was worth 200 trillion yuan (£20.7 trillion) in 2019. China is currently also the world's largest online securities market.

This means Chinese companies often do not have to look abroad for investment as they do not have to worry too much about competition with foreign rivals since government regulations are set to restrict the activities of foreign fintech players in the country. China also owes much of its fintech success to the fact that some of the world's biggest fintech entities, such as Alibaba and Tencent, are based in the country.

The Chinese government has recently renewed its commitment to the industry. The world's first sovereign cryptocurrency, known as Digital Currency Electronic Payment (DCEP), or e-CNY was launched on August 29 last year. The digital money is pegged at 1:1 to the renminbi and a large rollout is expected before the 2022 Winter Olympics. Chinese society is also one of the most fintech savvy. Cash has mostly been replaced by QR-codes in large cities. In the first months of last year, tech companies processed around 210 trillion yuan in payments. Chinese banks are currently also focusing on blockchain technology and seek to apply this in lending to small and medium enterprises, managing risk, and increasing operational efficiency.

Nevertheless, despite its fintech friendliness, China recently issued regulations that may disappoint fintech companies. This was mainly done because the industry's growth had overwhelmed the government's regulatory capacity. In Beijing, only 70 government workers are responsible for regulating over 7,000 firms. Peer-to-peer (P2P) lending has also collapsed in China due to widespread fraud. All P2P lending platforms had reportedly been closed as of November last year. And the government does not appear likely to stop soon. It recently targeted other forms of internet-enabled finance, such as Ant Group's micro-lending business, which saw its initial public offering blocked two days before launch. The new regulations do not appear to be aimed at crushing fintech companies but instead allow the government to control tech-linked leverage and fintech-related data while playing a more active role in the industry.

China's aging demographic is another problem in search of a solution. Therefore, despite the metropolitan areas enjoying a fast rate of financial digitalisation, fintech uptake may not be as fast as expected. Fintech development calls for healthy growth in the number of young people in a population. Without this, China's in-home fintech ecosystem may even collapse. Many people living outside the cities still lead traditional lifestyles. Some still prefer to keep their money at home instead of in banks, let alone embracing digital finance. It is estimated that at least 10 percent of the world's unbanked population, or around 225 million people, reside in China.

On the other hand, China's fintech empire abroad seems to be growing well. Several Chinese fintech companies have penetrated European and African markets. China has also made major investments in local fintech companies in those regions. The investment in Lagos-based OPayto is proof of China's interest in the African fintech ecosystem. Although the demographic problem is worrying, the nearly cashless metropolitan society in China is still a hugely profitable market for fintech firms. It was reported that four in every five transactions in China were cashless in 2020, amounting to around £35.22 trillion. Online wealth management is also seeing massive potential growth. According to the South China Morning Post, China is expected to see 10 percent growth in personal investable assets to 287 trillion yuan by 2025 from 160 trillion yuan in 2019. A total of 69 trillion yuan is also expected to be invested through online platforms by that year.

China's race to become a fintech powerhouse is of course not without challenges, but its problems are not unique. In China's case, these problems are just magnified. The fintech industry surely needs stability, and although China was overwhelmed by its explosive growth, the government has been addressing the issue relatively well. Other than the slow in-home fintech uptake and foreign competition, China's fintech future looks promising.

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