Caixin
Mar 11, 2021 07:37 PM
FINANCE

China Gets Some Advice on How to Regulate Fintech Without Killing Innovation

In the wake of the failure of Chinese peer-to-peer lending platforms, regulators have grown more cautious about potential risks resulting from innovation, according to the WEF. Photo: VCG
In the wake of the failure of Chinese peer-to-peer lending platforms, regulators have grown more cautious about potential risks resulting from innovation, according to the WEF. Photo: VCG

China needs to rethink how it regulates its fintech industry so that it applies the rules to companies based on what they do rather than what license they hold, the World Economic Forum (WEF) advised in a new report.

The advice aims to provide the country with a path for taming the often chaotic development of the country’s fintech industry while not stifling the innovation that has made it one of the most advanced in the world in certain aspects.

For regulation to help facilitate innovation, China needs a new regulatory model that will enable regulators to oversee all types of financial businesses, strengthen the consistency of the rules, and pilot a regulatory sandbox that keeps watchdogs responsive to new technologies, the WEF said in a report it released Wednesday on the country’s fintech industry in collaboration with the Shanghai Advanced Institute of Finance.

In some ways, China has already taken such advice. Over the past few months, fintech giants, especially Ant Group Co. Ltd., have faced tougher oversight, as regulators warned about systemic risks posed by their aggressive expansion that benefited largely from sidestepping some of the more stringent regulations imposed on traditional financial institutions.

To prevent this from happening, rules that took effect on Nov. 1 require nonfinancial companies in control of financial institutions in at least two different sectors to obtain licenses and operate as financial holding companies.

The WEF report comes as the Covid-19 pandemic has accelerated the digitalization around the world, making data the primary driver for delivering financial services.

China has left the rest of the world in the dust when it comes to the collection and use of data, as domestic tech giants have taken advantage of digital technology to transform a backward financial infrastructure into an online-focused system that plays a key role in providing financial services to individuals and corporations.

However, using data in this way raises new questions. The debate over data is now focusing on balancing its use with privacy protection, said Kai Keller, who leads projects on the future of China’s financial services at the WEF. “The effective use of data holds immense promise, which has to be enabled, while protecting privacy of individuals,” Keller told Caixin in an interview Wednesday.

The situation has left Chinese financial regulators with the difficult task of striking a balance between encouraging innovation while ensuring stability of the financial system and protecting consumer interests.

In the wake of the failure of Chinese peer-to-peer lending platforms, regulators have grown more cautious about potential risks resulting from innovation, and have become quicker to intervene, the WEF report said.

 Read more  
Reg Watch No. 2: Bringing China’s Wayward Fintech Firms Back Into Line

Last month, China’s banking regulator released tougher rules on online lending business carried out by banks and fintech companies, as part of its pledge to tighten supervision over internet platforms’ financial activities, as well as their cooperation with banks.

Investors who look for opportunities in China’s fintech industry must be aware of where Chinese regulations are heading, as the regulatory environment can shift rapidly, Keller said.

Hu Yue and Tang Ziyi contributed to this report.

Contact reporter Luo Meihan (meihanluo@caixin.com) and editor Michael Bellart (michaelbellart@caixin.com)

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