By Dr. Xu Hu, Head of Research, Chinese Academy of Financial Inclusion (CAFI)
As TikTok was being banned in the United States amid national-security concerns, users who called themselves “American refugees” were downloading a different Chinese social-media application, RedNote (Xiaohongshu). In the United States, discussions about regulating social-media platforms often focus on issues related to privacy, addiction, teenage mental health and political interference. In China, however, policy discussions on internet platforms have centered on their ambitious moves into the financial industry over the past decade.
To capitalize on internet traffic and large troves of data, China’s digital platforms have been collecting financial-services licenses—from payment to microcredit, from investment advisory to insurance brokerage—and offering a basket of financial services, among which lending has been at the center of the policy debates.
In August 2020, Ant Group announced its plan to create a consumer-finance company ahead of its well-anticipated blockbuster IPO (initial public offering). The global investment community largely perceived the news as a positive signal, but I had some doubts back then. Under China’s rules, consumer-finance companies, relatively speaking, are subject to more regulations than microfinance institutions (the license on which Ant’s lending businesses had relied). Thus, creating a consumer-finance company did not sound like “a great leap forward” to me. Not to mention that a new regulation was issued in July 2020 by the China Banking and Insurance Regulatory Commission (CBIRC) specifically targeting collaboration between commercial banks and internet platforms. As we all saw later, this was just the beginning of a regulatory tsunami targeting internet finance in China.
Five years later, some leading companies, which once had highly lucrative small and medium-sized enterprise (SME) loan businesses in China, are now experiencing losses due to a mix of factors. One consumer-finance company, which was once a frontier player in the field, has been selling its nonperforming assets and is about to exit the Chinese market.
At this point, it is probably helpful to walk through some key developments in China’s inclusive-finance space since the country formally rolled out its financial-inclusion national plan in 2015. I highlight four key developments:
1. Great progress in bank-account ownership and access to basic financial services
For people to access basic financial services—such as saving money, making payments and receiving funds—the traditional solution has been to have a bank account. In terms of bank-account ownership, there has been a steady improvement worldwide in the past decade. According to the World Bank’s 2021 Global Findex survey, the percentage of the global population owning a bank account increased to 76 percent in 2021 from 51 percent in 2011. At the same time, China made comparable progress. In 2021, nearly 90 percent of China’s adult population had at least one bank account, an increase from 64 percent in 2011. According to WIND, each person in China, on average, had 10 accounts and 7 cards at the end of 2023. (WIND is a data platform/integrator widely used in China to fetch economic and financial data.)
The statistics above imply that China has largely solved the problem of having an unbanked population. But given the size of the country, there are still about 130 million Chinese people who do not have bank accounts. The unbanked population in China, in absolute terms, is still larger than those in Indonesia, Pakistan, Bangladesh and Nigeria. I suspect that most members of the unbanked population in China are from rural areas.
Worldwide, there are places with limited or no presence of financial institutions because banks may not want to serve low-income communities. In the United States, the Community Reinvestment Act (CRA) provides banks with incentives to serve low-income neighborhoods. A similar problem exists in China but in a different vein.
The issue here is related to a serious divide between rural and urban China. The rural population not only has lower income and less wealth but also limited access to quality healthcare, education and employment. In terms of finance, traditionally, commercial banks have been reluctant to serve people in rural areas.
To address this issue, the Chinese government more than 10 years ago set targets to ensure that rural people had access to basic services. One target was having at least one bank branch at the township level. Another was at least one cash-in-cash-out shop—at which villagers can take out cash, check balances and make transfers—at the village level. At the end of 2023, about 660,700 village-level cash-in-cash-out shops spread across China, according to the People’s Bank of China (PBOC). American TikTok refugees, who are exploring real China on RedNote, may find this enlightening, as some communities in the US are still struggling with the discriminatory legacy of redlining.
2. Innovation unleashed by new players in credit markets
In the past decade, new players have emerged in China’s credit markets, including internet platforms (for example, super apps), which primarily focus on customer segments that commercial banks are either unable or unwilling to serve.
Internet platforms have unique advantages in credit markets compared with banks, especially small banks. First, they have traffic. People use their apps every day, even every hour. So, they are in a good position to reach out to potential customers to sell credit products. Second, they accumulate large troves of data, such as digital footprints. So, they may have some advantages in assessing, monitoring and controlling credit risks.
Initially, internet platforms acquired microfinance licenses to provide loans to their users. However, one disadvantage of microfinance licenses is that their leverage ratios are much lower than banks’ since microfinance institutions cannot take deposits. Another disadvantage that internet platforms encounter is the cost of capital. So, they started to collaborate with banks, especially regional and small banks that provide capital. And these banks rely on internet platforms to acquire customers who need loans and to assess and monitor credit risks.
Innovation unleashed by new players arguably helped make credit more accessible to people, such as small business owners, who are conventionally underserved by banks. However, banking regulators are concerned that the collaboration between internet platforms and banks may undermine the banking sector’s soundness, because it is now largely unregulated internet platforms that are overseeing risk control. Regulators also worry that consumers may be exposed to fraud, abuse of personal information and violent debt collection. As a result, a series of regulations have been rolled out since 2020 to discipline new players’ behaviors.
3. Public credit-guarantee schemes: a key infrastructure built
In 2015, the Chinese government made it clear that China aimed to build a credit-guarantee system whereby public credit-guarantee schemes played a dominant role. As a milestone, the National Credit Guarantee Fund of China was set up in 2018 (also called the National Financing Guarantee Fund), which serves as the “lender of last resort”, providing counter-guarantees and equity investments to public credit-guarantee schemes at provincial and municipal levels. Together with schemes at lower administrative levels, the National Credit Guarantee Fund assumes part of the credit risks, reducing the risks faced by banks and thus helping small businesses and farmers obtain credit. In 2023, the annual amount of counter-guarantees that the National Credit Guarantee Fund provided stood at RMB 1.31 trillion, a 43-times increase from RMB 30 billion in 20187.
Public credit-guarantee schemes are of particular interest because they, as a blended-finance instrument, can help mobilize capital towards frontier areas. Small businesses and farmers in China face considerable challenges in obtaining green loans for their journeys to net zero, as is true elsewhere. Barriers are manifold, but a key issue is that banks typically lack incentives to provide green loans to small businesses. In response, policymakers may provide a below-market-rate credit guarantee to banks as a “carrot” but require that the credit, extended to small businesses and farmers with the guarantee, must contribute to environmental objectives. In such a way, the widely used policy tool for bridging the SME-financing gap can be revived as an instrument to address the climate crisis.
4. Financial Inclusion 2.0: beyond access to finance
Back in 2020, I led a research project to forecast the market-growth potential of consumer finance in China. We made an upbeat projection, which a few banking professionals in credit-card businesses did not receive well. It turned out that they were right. China’s outstanding credit-card debt stood at RMB 8.7 trillion at the end of 2023, but the year-on-year growth rate in 2023 dropped to zero from 61 percent in 2013, according to WIND. Note that back in 2013, China’s outstanding credit-card debt was about RMB 1.8 trillion. When looking at the SME credit market, the growth potential looks bleak as well.
Access to finance probably remains an issue in some market segments, but surely, it has become less important. For market participants, it is time they realized that they are now competing in an environment in which market-wide growth is probably not on the horizon. For policymakers, it is time they recognized that an overemphasis on access to finance could be misplaced.
Although the last decade witnessed remarkable progress in financial inclusion in China, many Chinese still worry about not having enough money to pay daily expenses, emergency medical bills and retirement, as the World Bank’s 2021 Global Findex survey suggested. To get a better understanding of consumer financial health in China, my colleagues at the Chinese Academy of Financial Inclusion (CAFI) designed a 10-question questionnaire and conducted a large-scale survey in four provinces of China from June to August 2022. A total of 78,297 responses were collected.
By analyzing this data, we found that nearly 69 percent of respondents were struggling financially. Our analysis showed a much less upbeat picture of Chinese consumers’ financial resilience than the World Bank’s 2021 Global Findex survey indicated. More than 60 percent of respondents stated that if they lost their incomes, their savings could support basic living expenses for no more than three months. Our analysis also demonstrated that the higher the household debt, the worse the financial health.
Concluding remarks
In retrospect, as conditions stabilize, I still look up to “new players” for hope. Internet platforms and tech companies with “can-do” mindsets have helped transform the landscape of China’s financial industry, largely in a good way. Should the Chinese economy stumble, who, if not them, can unleash the “animal spirit” that would be badly needed at that moment? In the end, we do not want to “throw the baby out with the bath water”, do we?