The Bumpy Road to Regulating China's Internet Finance Industry


On Friday, the People’s Bank of China released a draft plan to regulate the country’s rapidly growing Internet finance industry. The plan has already become the target of harsh criticism from the tech industry and the public and is also the latest salvo in a showdown between the People’s Bank of China and China’s Internet regulators.

Internet finance—a catch-all term for a wide range of services including mobile device money transfers, online credit, QR code-enabled payments, and online wealth management tools—is a booming industry in China. Alibaba, China’s largest e-commerce company, has over 300 million registered Chinese users on its online payment platform, Alipay. Alipay Wallet, the mobile version of the service, has 190 million active users; compare that to Paypal, which only has 169 million. The country’s largest online money market fund, Yu’ebao, has more than 185 million users and assets worth around $93 billion. And while there’s no available data on how widespread usage of QR codes for mobile payment are, the little patches of squares are ubiquitous in China.

The growth of this industry has been driven by a number of factors. Chinese Internet users prefer to access the web on mobile devices, which explains the mobile tilt of Chinese online payment platforms. Online wealth management tools make it easy to save without leaving the comfort of your home and generate returns twice as high as traditional banks. The makeup of China’s economy has also undoubtedly played a role: migrant workers in the coastal regions use the online platforms to send money back home to their families.

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It’s no surprise, then, that the Chinese tech industry and many members of the public responded in outrage when the People’s Bank of China (PBOC) proposed regulations for the online payments industry on Friday. They say that the new rules will hurt Chinese consumers and stifle technological innovation in a web of red tape. The rules cap payments made through an online payment platform at 5,000 RMB ($800) per day and limit QR code-enabled payments to 200 RMB per day; prohibit peer-to-peer payments (think Venmo); and require users of online payment platforms to register their real name and provide identification to verify it. Instead of using third-party platforms, the PBOC expects Chinese citizens to go through a state-owned bank, saying that this will guarantee the security of payments and guard against fraud.

Earlier this year, Chinese premier Li Keqiang called on Chinese citizens to follow the lead of the tech industry and be entrepreneurial and innovative. Last month, the State Council released a plan for “Internet Plus”—an effort to integrate the Internet into traditional manufacturing, stimulate the domestic tech industry, and spur the next stage of economic development. The PBOC’s proposed regulations are in direct opposition to that goal.

“With these new rules, instead of lowering the barriers to innovation, they’ve raised them,” author of the book “The Internet Finance Revolution” Yu Fenghui told the Wall Street Journal earlier this week. “The implementers of these rules are looking at this from the perspective of protecting the banks.”

Not surprising, considering China’s central bank is the agency promulgating the regulations. Chinese state-owned banks stand to make a substantial profit if they can take over the entire Chinese online payments industry, which processed $1.28 trillion in transactions last year. The draft regulations are open for public comment for the next several months; online payment platforms have already said they plan to communicate their concerns to regulators. Luckily for Chinese consumers, online payment platforms, and ecommerce startups, they may have a powerful ally on their side: the Cyberspace Administration of China (CAC).

When new policy initiatives related to cyberspace are released, the CAC typically features triumphal news coverage of the government announcement on its site. After the National People’s Congress announced a new Cybersecurity Law, the CAC called it “important historical progress.” Coverage of the new “Internet Plus” plan said it would “bring new opportunities to tell the ‘China story’” and introduce a “digital revolution” to traditional industries.

By contrast, the coverage of the online finance regulations was rather muted. “Online payments may be restricted,” read one headline. “Strict third-party payments oversight raises controversy; the ‘free lunch’ of inter-bank transfers is going away,” another lamented. Another featured article declared that 60 percent of netizens believe that the regulations will hurt ecommerce and online money transfers. Featured right next to these articles was an interactive feature celebrating ecommerce and encouraging recent college graduates to consider starting their own online stores.

The siloed nature of the Chinese bureaucracy has long fed turf wars between different arms of the Chinese state; such conflict is nothing new, particularly for the PBOC. Last year, the CCP created the Central Leading Group for Internet Security and Informatization to overcome this very problem by getting top-level policymakers together to coordinate decisions. Both PBOC governor Zhou Xiaochuan and CAC head Lu Wei are members of the group. While both Zhou and Lu are political heavyweights, the CAC has enjoyed elevated prominence since it was created last year, due largely to the importance the Xi-Li administration has placed on cyber policy. In the coming months, we can expect to see further back-and-forth over Internet finance. For the sake of China’s tech giants and a Chinese public that is relying on Internet finance platforms that are more diffuse and democratic than traditional banks, let’s hope the PBOC doesn’t get its way.

Lincoln E. Davidson is a Research Associate in Asia Studies at the Council on Foreign Relations. His research interests include rural China, Chinese cyber policy, and cross-Strait relations.

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