China and fintech have become synonymous with one another as the industry has grown in the country and in Asia more widely. Many use Chinese technology that has been around for years as a case study for embedded and integrated banking into everyday life. COVID-19 has only accelerated that. But there are holes in fintech’s expanding network, and a long way to go before the country reigns supreme in the fintech stakes.
Domestic opportunity
China has a lot of factors that encourage strong fintech uptake. Back in 2018, China was leading the world in fintech deals at $25.5 billion – which accounted for 46% of global fintech investments. In the start of the 11th century China was one of the first parts of the world to introduce paper money for transactions. Today, it is a predominantly cashless society – in fact one of the least cash dependent in the world. With 83% of region’s population subscribed to mobile phone services in 2021, it seems on track to achieve their goal of being completely cashless.
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.
But doing business in China, even when you are at the forefront of their tech boom, can be treacherous, as Jack Ma proved. As one of the richest entrepreneurs in China, there was alarm when Jack Ma all but disappeared from public eye after a speech in late 2020 that criticised the Chinese government’s financial regulations. He has supposedly been spotted once or twice since – most recently his yacht was seen parked up in Andratx, Mallorca, but there has been a lot of discussion as to how or why he has dropped off the face of the earth in such dramatic fashion.
Controversies aside, other ingredients have made China a flourishing ecosystem for digital financial services. Mostly notably, their tech. They already have existing conglomerates whose pace of growth in the e-commerce and technology spheres are almost totally unrivalled 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.
All for one and one for all?
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 on the other hand, twenty percent of China’s population was unbanked in Q1 2021. That’s nothing compared to the likes of Morocco (71%) or close neighbour Vietnam (69%), but in hard numbers that 287 million people.
Migrant populations suffer the most with being outside of the cashless, seamless banking system. They often work with a system of paper receipts and slow wire transfers that can mean the difference between a family putting food on the table or not. Many in rural populations sleep with their entire life savings hidden in a hole in the floor. Others travel with all of their money on their person when making long trips. There are rural regions that lack any bank branches. During COVID, that only got worse, with bank branches decreasing as infection rates rose. A recent rural banking scandal in Henan province saw bank users cut off from their accounts as criminals syphoned off their money. Henan sits in the centre of China, only around 700km south of Beijing, but the province’s banking landscape could not be more different to that of Beijing. The national government stepped in to look into the situation, but they no doubt also stepped into a situation they worry will continue to happen as long as their more rural and remotely populated provinces still depend on bank branches and traditional banking groups.
It seems bizarre that a country can be so technologically savvy and yet have such a high portion of the population on the exact opposite end of the spectrum. But dichotomies like this exist in banking across the world: in China they are simply magnified.
Who will work in China’s fintech industry?
Stark data reveals that China has a rapidly ageing 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 examples such as Ant Financial (part of Alipay) buying a stake in Swedish firm Klarna; Alipay partnering with TransferWise; 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 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 elsewhere in the world? 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 by Opera, a Norway-based but majority Chinese-owned company. Opera was a Norwegian 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 is becoming ever more finely weaved together.
Government support
The Chinese government has often been seen as friendly towards fintech. It has had a more laissez-faire attitude to the industry 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 have 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. A couple of years ago the People’s Bank of China 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 other battles. Ones outside his borders, such as the recent, and still ongoing, trade war with the US. After that stellar year of deals in 2018 mentioned at the beginning of this article, the 2019 figures were significantly lower. And just like across the rest of the world, fintech rushed in to fill the rips that COVID tore into the traditional banking sector. 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
China’s reputation on the world’s stage is varied, to say the least. COVID-19 created some difficult global conversations with China. Whilst some countries raged and wanted punishment, others were grateful for China’s mass offering of medical equipment, expertise and experience – many countries managed to do both at the same time. Those words will be remembered for a very long 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 with 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 the 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 ageing 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.