This country-specific Q&A provides an overview to Fintech law in China.
It will cover open banking, regulation of data, cryptocurrencies, blockchain, AI and insurtech.
This Q&A is part of the global guide to Fintech. For a full list of jurisdictional Q&As visit http://www.inhouselawyer.co.uk/index.php/practice-areas/fintech/
What are the sources of payments law in your jurisdiction?
China's legal system is based primarily on the model of Civil Law, and therefore the sources of payments law are in the form of code law. Currently, they are in the form of various laws, administrative regulations, rules, policies and circulars issued by the People’s Bank of China (“PBOC”), the central bank of the People’s Republic of China, among which the most important laws and regulations include:
(i) PRC Law of the People's Bank of China (《中华人民共和国中国人民银行法》) adopted by the National People’s Congress;
(ii) Measures for Payment and Settlement (《支付结算办法》) issued by the PBOC ; and
(iii) Administration Measures on Payment Services by Non-financial Institutions (《非金融机构支付服务管理办法》) issued by the PBOC.
Can payment services be provided by non-banks, and if so on what conditions?
Under the current payments law, payment services can be provided by non-banks. A non-bank entity can provide payment services if it can be granted an administrative license, entitled the Permit for Payment Business, by the PBOC.
What are the most popular payment methods and payment instruments in your jurisdiction?
The most popular payment methods in China are electronic payments through communication networks (including the Internet) and prepaid card payments.
What is the status of open banking in your jurisdiction (i.e. access to banks’ transaction data and push-payment functionality by third party service providers)? Is it mandated by law, if so to which entities, and what is state of implementation in practice?
Open banking in China so far is a pure business initiative of the banks. There are no laws or regulations generally compelling, encouraging, restraining or prohibiting open banking in China. However, if a bank wants to offer open banking options, it must comply with various administrative regulations, rules and policies issued by the China Banking and Insurance Regulatory Commission. These laws regulate the risks in association with the outsourcing services relating to the information technology or routine operating process.
How does the regulation of data in your jurisdiction impact on the provision of financial services to consumers and businesses?
The regulation of data has a huge impact on financial service providers. The PBOC created a broad legal concept of the individual financial information, which covers virtually almost all the information collected by banking institutions in the course of their banking services with the individual customs. Financial institutions are not allowed to transmit, store, process and analyse outside of China, any of the individual financial information collected within China. Financial institutions must not sell, provide to a third party without the consent of the customers, or use for non-banking services purposes, the individuals financial services.
What are regulators in your jurisdiction doing to encourage innovation in the financial sector? Are there any initiatives such as sandboxes, or special regulatory conditions for fintechs?
In recent years, the Chinese government is paying increasing attention to encouraging innovation in an effort to develop fintech industry. China has introduced a series of regulations and policies to encourage innovation in such area. For instance, the PBOC launched the 13th Five-year Development Plan of China’s Financial & Information Technology Industry in June 27, 2017 (《中国金融业信息技术“十三五”发展规划》, the “Plan”), highlighting five key tasks including the application of new technology and the development of innovation.
The PBOC also established a special committee, the Financial Technology Committee, to undertake research on fintech’s influence in the areas of monetary policy, the financial market, payment and settlement methods and so on. This committee have also been examining a new management model to promote fintech innovation.
“Regulatory sandboxes” have also been introduced by the local government in certain China cities to encourage and accommodate financial innovations. One good example is that, Guiyang, capital city of Southwest China's Guizhou Province was approved as the first pilot city in China to launch “IOC sandbox” plan in 2017.
Do you foresee any imminent risks to the growth of the fintech market in your jurisdiction?
The imminent risks may come from two aspects:
(a) Industrial risk: Chinese players in the fintech market are immature and the national, or industrial standards, in certain sectors are still developing, or even there are no standards in place to follow, which would post a remarkable challenge to the healthy and ordered development of fintech in China (using the P2P industry as an example, in the past 2 years China has launched a campaign to clean up the P2P market, as a result of which almost 75%-80% P2P service providers who are not qualified have been swept out of the market);
(b) Legal risk: The legislation on China’s fintech industry always falls behind its market practice. A contradiction could arise, being that, on the one hand, the lack of highest-level legislation on the fintech market makes the operators in many areas in “supervision vacuum”; and on the other hand, for particular areas of fintech tight regulation is often seen, where China follows the old way of its supervision on traditional financial industry. China’s current supervision and judicial system seems to have difficulty in accommodating to the fast growth of its fintech market.
What tax incentives exist in your jurisdiction to encourage fintech investment?
China has long put in place favourable tax polices toward emerging enterprises in high-and-new technologies, including fintech companies, though no special or targeted tax incentives or treatments are available to fintech companies. For instance, a high-tech enterprise passing the national certification is entitled to a favourable a rate of corporate income tax at 15%, compared to the normal rate of 25%.
Which areas of fintech are attracting investment in your jurisdiction, and at what level (Series A, Series B etc)?
In recent years, artificial intelligence (AI) and consumer financing are the two fintech areas that mostly attract investment, whereas before 2014 internet payment, cloud computing and asset management were the hot destinations in China for both domestic and international venture capitals.
Based on our observations, among Chinese fintech companies, most of them are in their early stage of financing (Series Angel, pre-A, A and B). However a few of them have developed into a unicorn company, if we use a valuation exceeding US $1 billion as a threshold (the most notable companies include Ant Financial, JD Finance, Webank and Lufax), or have successfully achieved an IPO in overseas stock markets (such as Yirendai, Qudian, 51 Credit Card and Dianniu98).
If a fintech entrepreneur was looking for a jurisdiction in which to begin operations, why would it choose yours?
We consider that there are three major strengths of China in its developing fintech industry.
Firstly, China is expected to remain dominant as the world’s economic engine in the upcoming 2-3 decades, bringing about a huge number of small-to-medium sized enterprises and middle-class families. Against this backdrop, traditional financial services are unable to meet the fast-growing needs of modern business activities (e.g., the rise of e-commerce), which will spur the booming of the fintech market.
Secondly, since the fintech industry is founded on Internet, China has the world’s most powerful network infrastructure which will boost the development of fintech market, e.g., with the widespread use of smartphone in China, more and more Chinese people begin to accept the way that handles banking affairs through Internet.
Lastly, but by no means the least important, the Chinese government’s efforts to strengthen oversight and supervision on the fintech market will provide powerful institutional guarantees to each participant therein. In addition, a series of incentive policies and preferential treatment introduced by Chinese government will also provide a motivated power source and encourage innovation within this market.
Access to talent is often cited as a key issue for fintechs – are there any immigration rules in your jurisdiction which would help or hinder that access, whether in force now or imminently? For instance, are quotas systems/immigration caps in place in your jurisdiction and how are they determined?
China has flexible regulation and practice on immigration matters, and the general policies welcomes foreign talents. Although the law requires that all foreign nationals working in China are subject to the work visa and work permit requirements, it is not difficult for foreign national talents to obtain work visas and work permits if they have legitimate employer contracts with decent employers.
In addition, the central and local governments of China both release policies to offer convenient and incentives to attract high level technical talents. The high-quality talents include foreign national experts in certain science and technology areas, and the highly educated Chinese returnees.
If there are gaps in access to talent, are regulators looking to fill these and if so how? How much impact does the fintech industry have on influencing immigration policy in your jurisdiction?
The most famous program to introduce and attract high level talents to serve in China is the central government initiated ‘Thousand Talents Program’ (“TTP”). TTP includes long term talent programs, short term talent programs, entrepreneur programs, youth programs, foreign expert programs, top-tier talents and innovative teams, Tibet and Xinjiang programs, and culture & art talent programs. Talents selected in the TTP receive tax-free national funds for their research, and their compensation will be free of individual income tax.
In addition, the local government usually will also provide additional incentive to facilitate the talents under the TTP, or to support local talents programs.
What protections can a fintech use in your jurisdiction to protect its intellectual property?
A fintech service provider can protects its IP through protection mechanisms for copyright, trademark, patents, and know-how, if the IP of the fintech service provider meets the statutory requirements for those concepts under the applicable PRC laws, or the international conventions entered into by China.
How are cryptocurrencies treated under the regulatory framework in your jurisdiction?
Under PRC law, cryptocurrencies are not currencies and cannot be used to redeem for cash or cash equivalent. It is only treated as a goods with money value.
How are initial coin offerings treated in your jurisdiction? Do you foresee any change in this over the next 12-24 months?
The initial coin offering and operation of cryptocurrency exchange platform within the PRC territory is defined as illegal fund raising and illegal public offering of securities, and hence is strictly prohibited by the law. We do not foresee any change to such determination in the next 12 to 24 months period.
Are you aware of any live blockchain projects (beyond proof of concept) in your jurisdiction and if so in what areas?
Yes, we have live blockchain projects applied in many areas. The areas that use blockchain includes the Internet of Things, the company registration administration by the corporate registration authorities, the supply chain management, stock transaction records and registration, banking operation (transaction record and registration, credit information management, electronic drafts, transaction settlement and etc).
To what extent are you aware of artificial intelligence already being used in the financial sector in your jurisdiction, and do you think regulation will impede or encourage its further use?
The artificial intelligence (AI) is observed to be constantly used in the following financial sectors:
(a) Banking services - e.g. many banks use AI technologies to develop chatbots to provide traditional customer services;
(b) Personal wealth management - e.g. AI technologies are used in making portfolio investment suggestions or decisions for the customers based on their respective risk preference;
(c) Insurance services - e.g. insurance firms have begun to use AI technologies to assess the repurchase rate of customers;
(d) Consumer finance - e.g. in auto finance sector, AI technologies may help finance companies to make risk assessment and provide credit products of highest match degree to consumers,
(e) Supply chain finance - e.g. AI technologies are used to create a bridge between the fund demanders and fund suppliers in the most efficient way; and
(f) Third-party services to financial institutions - e.g. third-party service providers use AI technologies to provide professional services to traditional financial institutions in their model designing, customer identity recognition, risk control and anti-fraud based on data analysis.
The Chinese government will encourage the novation of the usage of AI in the financial industry to improve efficiency and reduce the repetitive work and costs. Nevertheless, there will be inevitably some push and pause of the further application of AI technologies based on how the financial markets develop and react.
Insurtech is generally thought to be developing but some way behind other areas of fintech such as payments. Is there much insurtech business in your jurisdiction and if so what form does it generally take?
The insurance industry in China is highly regulated by the China Banking and Insurance Regulatory Commission. The obtaining of an insurance permit in China is an especially challenging and time-consuming process.
Compared to all other fintech areas, insurtech is lagging behind, however, many of the insurance companies are scaling up their own digital expertise to different extents. Traditional players are the insurance companies such as PICC (中国人民保险) and Ping An(中国平安保险). The new players are companies such as Zhong An Insurance(众安保险) andTaikang.cn(泰康在线), and challengers are companies such as Baidu, Alibaba and Tencent, who have all entered into the field of digital insurance.
There has been competition and cooperation among all the players at the same time, which allows the players to learn from one another and facilitate the dealing progress. On the other hand, some of the traditional players have set up network platforms for the distribution of insurance products, and they also collaborate with the fintech companies to different extents, the latter can provide the incumbents technologies including network technology supporting and auxiliary services.
Are there any areas of fintech that are particularly strong in your jurisdiction?
The Mobile payment area is particularly strong in China compared to other countries in the rest of world.
Mobile payments are used by just about everyone in China in their daily life, from making payment in fancy shopping malls, to paying the bills to street vendors. At present, the fintech in payment area is dominated by two giant players. One is Alipay, operated by Alibaba, and the other is Wechat Pay, operated by Tencent. Tencent’s WeChat Pay has 900 million monthly active users, while Alipay, has over 500 million monthly active users.
What is the status of collaboration vs disruption in your jurisdiction as between fintechs and incumbent financial institutions?
On one hand, fintech companies can equip traditional financial institutions with innovative ideas, digital service, entrepreneurial talent management, big data services. For instance, Wechat Pay work with traditional banks to allow users to link their credit cards to their online wallets. Traditional financial institutions can also provide fintech companies with big data, comprehensive product designs, professional risk management expertise, and the convenience of thousands of physical branches. The innovation of incumbents is driven by the fintech companies in multiple ways, and the fintech companies also benefited from the experiences the incumbent financial institutions accumulated.
On the other hand, with the fintech companies entering into the financial fields, incumbents are facing the difficulty to overcome the disruption caused by new fintech counterparts and how to synchronize and adapt to the new changes that facilitate customers’ satisfaction. For instance, the Yu’e Bao fund integrated into Alipay became the world’s largest money market fund within 4 years. Assets under management have moderated to around RMB 1.45 trillion (approximately 213 billion US dollars) as Yu’e Bao (余额宝) launched other money market funds to address concerns from regulators on the size of a single fund. With the rising of Yu’e Bao, the incumbents are facing difficulties to change the traditional channel to sell the fund products to Internet and also apply AI tools to boost the efficiency.
To what extent are the banks and other incumbent financial institutions in your jurisdiction carrying out their own fintech development / innovation programmes?
The incumbent financial institutions are carrying out their own fintech development in difference areas: wealth management, internet financing, payment, credit research, supply chain financing, online securities, online mutual fund, online insurance, P2P lending, crowdfunding, information platform and etc. However, these institutions have been slower to adopt new methods, due in large part to the potential switching costs as they migrate to new systems or new processes. Most of the incumbent financial institutions have established fintech department to carry out their own fintech development, form customer analytics, risk management, automated processing, to AI customer service robots and so on.
Are there any strong examples of disruption through fintech in your jurisdiction?
P2P lending has become an important channel and a useful supplement for small-to-medium sized enterprises to obtain financing. However, the collapse and transformation of some bad platforms, especially the illegal use of P2P online loans to illegally absorb public deposits or fraud, seriously disrupted the order of the Internet financial market and dampened market confidence and brought property losses to users.
For the past few years, compared to the insurance industry, the securities industry and bank industry, P2P lending industry has been the least regulated area. For instance, Zhongbao Investment Network Platform (中宝投资), which was established by Zhou Hui on 2011, has illegally raised funds of almost 2000 unspecified objects nationwide, totalling more than RMB 1.03 billion. In addition to the payment of principal and income return of RMB 691 million, there are still more than RMB 356 million yuan that could not be returned. However, currently the P2P lending sector is going through a regulatory shakedown. In the past 2 years, nearly all of the P2P platforms have had to cease their operations in 2018 for self-examination, in accordance to a series of rules and regulations issued by the Chinese government, in order to meet the newly adopted stricter standards.