FEATURES FINANCE

Fintech Supervision
China strengthens oversight of Internet-based financial businesses By Wang Jun

I
nnovation in financial technology (fintech) Ant Group, which is headquartered in Hangzhou, Zhejiang Province, an-
has made life easier, but how about potential nounced that it had removed all its online deposit products. This move was
risks? China’s banking and financial authori- then followed by a dozen other online financial platforms affiliated to leading
ties’ regulatory talks with Ant Group, the fintech Internet firms such as Tencent, JD.com and Baidu.
affiliate of e-commerce giant Alibaba, at the end
of last year were evidence of the government’s Potential risks
concern. The online deposit products were ordered to be removed because the finan-
The meeting was attended by officials from cial supervisory authorities noticed the potential risks of such products.
the People’s Bank of China (PBC), the China Small and medium-sized banks broke the limit of traditional channels
Banking and Insurance Regulatory Commission in absorbing online deposits, and they were becoming national banks from
(CBIRC), the China Securities Regulatory the perspective of funding sources, which is a deviation from their market
Commission and the State Administration of position of being based in their local markets and serving micro, small and
Foreign Exchange. medium-sized enterprises, said Sun Tianqi, head of the PBC’s Financial
In a press release, PBC Deputy Governor Pan Stability Bureau, at a seminar on the supervision of digital finance held in
Gongsheng said the regulatory talks with Ant Hangzhou on November 7, 2020.
Group were mainly aimed at urging the firm to Sun said sellers of online deposit products deliberately highlighted the
fulfill financial regulatory requirements and the
requirements for fair competition and protection A banking robot at the
of consumers’ legitimate rights and interests. China International Fair for
“Fintech and Internet platform enterprises are Trade in Services in Beijing
on September 5, 2020
fresh business forms that innovate and evolve
rapidly, taking on many new features,” Pan said.
“Financial regulators will continue to strengthen
international exchanges and cooperation in su-
pervision, while promoting fintech innovation as
well as the healthy development of the financial
system.”
An announcement from Ant Group said that
it accepted the requirements and would establish
a special working group to deal with rectification
and follow guidance from the regulators during
the entire process.
In early November 2020, the Shanghai and
Hong Kong stock exchanges suspended Ant
Group’s planned initial public offering.
Also, the Zhejiang Office of the CBIRC is-
sued a notice in late December 2020, requiring all
types of banking institutions within its jurisdic-
tion to stop accepting deposits through third-party
Internet platforms or through cooperation with
other third-party intermediaries, and to remove
existing such deposit products.
A few days before the notice was issued,
40 BEIJING REVIEW JANUARY 14, 2021 http://www.bjreview.com

government’s protection of deposits and implied
“Financial that online deposits have “zero risk” and “high
regulators will yield.”
continue to Dong Ximiao, chief researcher with Merchants
Union Consumer Finance Co. Ltd., said that on
strengthen the business chain of online deposits, the Internet
international platforms provided an interface for information
exchanges and display and purchase, while deposit products and
services were provided by banks.
cooperation in “In this pattern, it needs to be confirmed by
supervision, the financial supervisory authorities whether
while promoting Internet platforms are suspected of illegally han-
dling savings business. Internet platforms are not
fintech savings institutions regulated by law, and they
innovation as cannot handle savings business,” Dong said when
interviewed by Economic Information Daily.
well as
Wang Yifeng, chief analyst of finance with
the healthy Everbright Securities Co. Ltd., said small and
development medium-sized banks were highly dependent on
Internet platforms in attracting online deposits.
of the financial Conventional liquidity management indicators
system.” are not able to fully assess the instability of online
deposits, making it more difficult for small and
—Pan Gongsheng, PBC
Deputy Governor medium-sized banks to manage their potential
liquidity risks.
In the meantime, the high costs of online de-
XINHUA
posits are likely to increase the potential risks.
Small and medium-sized banks don’t have
enough capability in investment, so they have to
invest the deposits they attracted through Internet
platforms in high-risk assets, which may result in
accumulation of credit risks, Wang told Economic
Information Daily.
Blind spots of supervision
There are hidden risks behind online financial
business through cooperation between banks and
Internet platforms.
Guo Feng, an associate professor with the
School of Public Economics and Administration
of the Shanghai University of Finance and
Economics, said in the online deposit business,
financial institutions with a strong position may
shift their risks to Internet platforms via contracts
or other ways. Internet platforms are not financial
institutions, but they actually assume financial
functions. However, they are not subject to super-
visory requirements such as the capital adequacy
ratio and liquidity that financial institutions must
abide by.
According to him, in the cooperation between
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FEATURES
large Internet platforms and small or medium-
sized financial institutions such as local banks,
the latter have to take most of the risks and costs
because they have weak bargaining power and
inadequate risk control measures against Internet
platforms.
In addition, the cooperation between local
banks and Internet platforms imposes new chal-
lenges to financial supervisory authorities that are
used to the supervision of financial institutions in
their respective localities, Guo said in an interview
with news website ThePaper.cn.
“Small and medium-sized banks are unable
to conduct effective risk control but have to bear
all the debts in the online deposit business,” Chen
Wen, head of the Digital Economy Research
Center of Southwestern University of Finance and
Economics, told ThePaper.cn.
He said this will lead to a serious moral
hazard. It will be possible for small and medi-
um-sized banks to frantically rely on Internet
platforms to attract deposits and grant loans,
expanding their asset scales rapidly as long as
they are willing to do so, but the one ultimate-
ly assuming all the risks may be the central
bank.
Therefore talking about future supervisory
policies on fintech companies, Pan said in the
PBC press release that all financial activities must
be brought under regulatory coverage in accor-
dance with laws and regulations, financial services
must be conducted on a license basis, and zero
tolerance will be adopted for illegal or irregular
conduct.
Guo thought more supervisory measures are
likely to be formulated in the future to regulate the
cooperation between traditional financial institu-
tions and fintech platforms and make the risks and
responsibilities more reasonably shared by the two
parties.
“However, I think the supervisory depart-
ments also need to consider how to better divide
the responsibilities of central and local supervi-
sory authorities, and how to make the traditional
supervisory model better adapt to the demand in
the Internet era, rather than simply requiring the
Internet-based business to adapt to the traditional
supervisory model,” Guo said. BR
Copyedited by Madhusudan Chaubey
Comments to wangjun@bjreview.com
JANUARY 14, 2021 BEIJING REVIEW 41
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