Academic journal article China Perspectives

China's Internet Finance Boom and Tyrannies of Inclusion

Academic journal article China Perspectives

China's Internet Finance Boom and Tyrannies of Inclusion

Article excerpt

Introduction

This article critically examines the sudden emergence and expansion of Internet finance in China. Over the past decade, China's Internet finance industry has grown and diversified at a dizzying rate. Hundreds of millions of people now use third-party online payment services to complete financial transactions, turn to peer-to-peer (P2P) lending platforms or online banks to borrow money, and sidestep brick-and-mortar financial institutions to invest their savings in online investment funds (Guo, Kong, and Wang 2016). This has marked a sea change in how commerce operates in the country, and has transformed the ways in which people access and interact with financial products. Prior to the Internet finance boom, the Chinese financial system was dominated by state-owned institutions operating partially based on political imperatives, rather than unrestrained profit seeking. In China, formal banks are required to lend at below-market interest rates, and have historically targeted larger enterprises and local governments with their loans, making it difficult for households or small businesses to gain access to credit (Ong 2012). The rise of Internet finance has dramatically changed this situation. With the government being slow to issue regulations on the provision of digital financial services, Internet finance providers have had much more freedom to operate than traditional brick-and-mortar financial institutions. This has resulted in vastly expanded coverage to previously excluded groups in both rural and urban areas. In China today, all that is needed to gain access to (semi)formal savings and credit is a smartphone.

China's rapidly evolving Internet finance industry is characterised by diversity and innovation, with a huge number of providers entering the market in an attempt to capitalise on the sudden liberalisation of financial service provision in the country. This has resulted in the development of a wide range of loan and investment products targeting a diverse client base- ranging from poor and marginalised rural populations to large urban enterprises in search of investment capital (Guo, Kong, and Wang 2016). Digital loans are primarily provided by two types of Internet finance institutions: online banks and P2P platforms. Online banks-such as WeBank (30% owned by Tencent) and MyBank (30% owned by Ant Financial of the Alibaba Group)-target those involved in e-commerce platforms, including Taobao shop owners and customers, using their online transactions to determine creditworthiness. Currently these banks are only in the business of providing loans, which vary in size from a few thousand to millions of yuan, at rates slightly higher than brick-and-mortar banks. However their ultimate goal is to become full deposit-taking financial institutions.(1) China's P2P market is the world's largest, with almost 6,000 P2P platforms facilitating transactions worth approximately one trillion yuan in 2016. Some large platforms, such as Paipaidai, serve more than two million active borrowers and lenders.® P2P platforms are theoretically only supposed to act as intermediaries, providing a service allowing lenders to offer credit directly to borrowers. However, in reality a wide range of P2P platforms operate in very different ways. In some cases platforms pool lender funds and engage in asset transformation, thus creating a space between the lender and the bor- rower (Deer, Mi, and Yu 2015). These types of practices have resulted in fraudulent activity and some high-profile bankruptcies (see section four), and have prompted a regulatory crackdown.(3) While this has restricted the behaviour of P2P platforms and somewhat consolidated the industry, space still remains for disruptive (or chaotic) innovation.

P2P platforms must be understood as vehicles for both credit and investment, as lenders use P2P services as an alternative to parking their capital in low-interest savings accounts. While engaging in P2P lending can be a relatively risky activity, it offers substantially higher returns than traditional types of investment. …

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