China and fintech have become synonymous with one another as the industry has grown. Many use Chinese technology as a case study for embedded and integrated banking into everyday life. Our Features Editor Sophie Camp looks into the future of fintech in China and whether it’ll be rosy or thorny.
China and fintech
First, a round up of China and fintech. Back in 2018, China was leading the world in fintech deals at $25.5 billion – which accounted for 46% of global fintech investments. There are a lot of domestic investment opportunities for fintechs in China, which means that Chinese based fintech companies often don’t have to open themselves up to the outside world to be able to get the funding they need. Which is good, because oftentimes they can’t – China has created a number of limitations on foreign investment in an attempt to keep foreign competition on Chinese soil as low as possible.
Other ingredients that have made China a flourishing ecosystem for digital financial services: their tech. They already have existing conglomerates whose pace of growth in the e-commerce and technology spheres are almost totally unrivaled globally. Tencent, Baidu and Alibaba are some of the biggest tech companies in the world, and with their massive amounts of funding they are able to step into new industries like it was nothing.
Uptake of financial technology
When we think of China and technology, we think of a symbiotic relationship that permeates every part of life. Chinese citizens are able to renew passports, make tax payments, receive health results, book flights, request loans – all through apps on their phones. But China isn’t yet the utopian world of fintech uptake. Ten percent of the entire global ‘unbanked’ population is in China – that’s 225 million people. Migrant populations suffer the most, with a system of receipts and slow wire transfers making sending and receiving money incredibly difficult. A lost receipt has often meant the difference between a family putting food on the table and complete poverty. Many in rural populations live with their entire life savings hidden in a hole in the floor, and travel with wads of cash on their person when making long trips. It seems bizarre that a country can be so technologically savvy and maintain such a high population of the exact opposite end of the spectrum. But dichotomies like this exist in banking across the world: in China they are simply magnified.
What does the future look like for Chinese fintech update? It’s not exactly clear. Stark data reveals that China has a rapidly aging population. Their one-child policy is perhaps not as strict as it once was, but since the 1980s the brakes were sharply applied to their birth rate. This has had a long term impact, and China’s population is starting to retire, age and require eldelry care en masse. Financial services and technology uptake is not as prolific in older population demographics. As this ChinaPower report states: “For decades, China reaped the benefits of a demographic dividend that supplied a young workforce for its manufacturing sector, which enabled China to emerge as a global economic power.” Whilst this speaks to manufacturing, it could as easily be written for financial technology. Fintech needs a young, technologically savvy population to help boost the industry with manpower and innovative ideas. If that is lacking, and those pools of talent are not being replenished with each generation, China may be forced to look outside of its borders. And that, as China’s history demonstrates, is often a sore subject.
An outward look
Whilst domestic investment is promoted – and is explained in more detail below – the home grown fintech giants of China are starting to step outside of their own national borders. Recent investment in foreign fintechs from Chinese companies include: Ant Financial (part of Alipay) recently buying a stake in Swedish firm Klarna; Alipay partnering with TranserWise; and WeChat pay recently dubbed Europe its ‘next key market’.
Much of this interaction with foreign competition is to try to appeal to the Chinese tourists that flock to Europe every year, but also the many Chinese expats that want to use the same technology as their family’s back home. Whilst the domestic market might be dominated by a few names, China’s fintech companies are stretching their reach globally, and making their presence known elsewhere. Can it begin to edge out incumbent fintechs in Europe and Africa? That remains to be seen.
And China isn’t just focussing on Europe. The recent investment in Lagos-based OPay shows a strong interest in the African fintech ecosystem. As TechCrunch put it: “Nigeria has become the epicenter for fintech VC and expansion in Africa. And Chinese investors have made an unmistakable pivot to African tech.” Although maybe this is more of a domestic investment than it at first seems. OPay was founded up by Opera, a Norway-based but majority Chinese-owned company. Opera was a Norweigan backed and based company until 2016 when Golden Brick Silk Road fund, a Chinese consortium based in Beijing, bought it for $600m. The chain of domestic and foreign investment to boost Chinese fintech future is becoming ever more finely weaved together.
The Chinese government has often been seen as friendly towards fintech. It has had a more laissez-fair attitude to fintech in the past, which has allowed new and upcoming startups to flourish. Whilst limiting foreing investment and foreign competition, the domestic fintech market in China is huge and still growing. But in 2019, the Chinese government made some steps to enforce regulation upon the industry. The Standardization Administration of China exists to create national stands on a particular industry, and at the end of last year their eye turned to financial technology and blockchain. Their focus is mainly on data transparency and safety, but they also have some issues with cryptocurrency that has had to be worked through at a research and policy level.
The Chinese government has also not been shy to spend its own money on strongly backing the fintech industry. And, clearly, not as crypto unfriendly as they had first seemed. The People’s Bank of China recently launched DCEP, a central bank digital currency. The currency is set at 1:1 against RMB, and when asked why they created it their Deputy Director claimed: “It is to protect our monetary sovereignty and legal currency status. We need to plan for a rainy day.”
Whilst remaining aware of the dangers of fintech, China is also using it as a rainy day fund. Again, an interesting dichotomy sitting right in the heart of the Chinese banking system.
And the Chinese government is of course fighting its own battles with the world outside its borders. A trade war with the US and a slowing economic picture has put the brakes on the kinds of huge fintech deals that we have seen in the past. After that stellar year of deals in 2018 mentioned at the beginning of this article, the 2019 figures were significantly lower. It has yet to be seen what the long-term effects of the devastating coronavirus outbreak in China will have on the economy, and specifically fintech. Whilst the fintech industry globally has been largely holding its own during the current crisis, government help, support, intervention and opinion have a hugely connected role in fintech’s future in the country. It’s not quite clear yet whether the Chinese government’s focus on other matters will take their attention, patience and their money further away from the coffers of the nation’s financial services industry. And whether DCEP’s launch will be a starting pistol for new digital currencies, or the government’s attempts to gain some control over the private fintech boom.
China’s reputation on the world’s stage is varied, to say the least. COVID-19 has created some difficult global conversations with China. Whilst some countries rage and want punishment, others are grateful for China’s mass offering of medical equipment, expertise and experience – many countries manage to do both at the same time. The current trade war between China and the US is also a war of words dressed up in economic blows.
China has a relationship the world beyond its borders that this author doesn’t have the knowledge or the dexterity to explain or to sum up succinctly. Except, perhaps: it’s complicated. Perhaps fintech could be a way to extend a hand, as the Chinese government furiously try to buff up their global image in a wake of a pandemic whose origins have led to finger-pointing at their city of Wuhan. Perhaps fintech will fall victim to the ongoing battle of economics, politics and posturing that the world stage is so prone to. Whatever happens – as we’ve seen throughout this article – the government in China is inherently connected with the industry. Whatever happens to one has an impact on the other: the good, the bad and the ugly.
Another ‘perhaps’ to finish on: perhaps China will be able to serve as an example to other regions’ fintech ambitions. The challenges the Chinese based fintech industry has – an aging population, foreign competition, global reputation – are not unique. By taking the first steps into the rather muddy waters of a new fintech world, China could be the best sandbox that the fintech industry should keep an eye on.