Fintech in China: Big Foreign Opportunities

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In the wake of new government policies, Fintech in China has seen a sharp rise and foreign companies are now permitted to take part in this exciting sector. 

While Fintech has been around for a long time, its modern day usage has seen a dramatic rise in the past 3 years. Fintech stands for financial technology, a market that become more and more accessible to individual consumers. Fintech includes but is not limited to online stock trading applications and crypto exchanges. Giants like Alibaba, Tencent, Baidu are increasingly expanding their reach and ability to innovate thanks to the access to big data and millions of consumers.

Opportunities for foreign companies in the sector are on the rise. China recently announced policies to welcome foreign investments into the finance sector, which was previously governed by domestic firms with close ties to the CPC.

Overview of the fin-tech market in China

fintech in China 2021

With the development of artificial intelligence, cloud computing, big data, and other technologies, fintech has become the standard configuration for financial institutions and Internet companies.

In the global wave of fintech development, China’s fintech companies rank among the top in fintech application and innovation activities.

China has become an important driving force and market for global fintech development. According to the 2019 global fintech adoption rates index, the adoption rates of global fintech services increased year by year, from 16% in 2015 to 33% in 2017.

In 2019, the global financial technology adoption rate has reached 64%. Of the 27 countries surveyed by the report, consumers in China and India had the highest levels of fintech adoption rates at 87% each. Transfers and payments are the most frequently used fintech services by consumers, with 95% of Chinese consumers using them.

The development of fintech has become a global consensus, and China is not exempt from this.

Beijing, Guangzhou, Shenzhen, Hangzhou, and other places have issued policies related to fintech to support various aspects of fintech enterprises such as talent training, infrastructure promotion, platform building, and capital introduction.

On March 8, 2019, the Fintech Committee of the People’s Bank of China held its first meeting, stressing the need to strengthen the research and planning of fintech and improve its application and management level, so as to provide the impetus for the transformation and upgrading of the financial industry.

Who is driving fintech innovation in China: large companies, SMEs, or startups?

Difficult and expensive financing have been the main problems faced by small and medium-sized enterprises.

With the deepening of financial reform and transformation, new financial technologies represented by big data can push financial services to a deeper level.

The innovative application of financial service in the real economy model and technology has become an effective means to break the development bottleneck of financial services.

Under the background of fintech innovation, relying on the advantages of the financing model of SMEs, to find a way to solve the financing difficulties of these companies.

The optimization of financial services for small and medium-sized enterprises needs to be realized through scientific and technological finance.

Science and technology are able to improve the innovation ability of commercial banks and other financial institutions and they can optimize the awareness of business services for customers.

Technological finance makes the services provided by financial institutions to SMEs simpler, more convenient, and more inclusive.

Many SMEs can enjoy more diversified financial services by providing financial payment, insurance, and other financial services through the technology financial platform.

What are the opportunities for fintech foreign companies in China?

The technological upgrade brings not only an upgrade of the business model but inevitably brings about more ways of making profits, mainly including the following aspects.

The first one is information technology.

Companies can now use big data to reduce information asymmetry and control risks. Internet enterprises accumulate massive user data and have a deeper understanding of users. But there is a question mark over how many companies can actually do this, and the difficulties related to this.

The second is the industrial chain model.

This model uses the characteristics of information flow, logistics, and capital flow of the upstream and downstream of the industry to control risks. JD, UPS, and Wal-Mart are such models.

In addition to the above two types, the technological upgrade also includes diversification type, high leverage type, and high maturity mismatch type.

However, the latter types are not different from traditional finance, and the financing cost can be reduced by utilizing diversification, high leverage, and high maturity mismatch. There are even China-specific phenomena, such as regulatory arbitrage and connected transactions.

What needs to be pointed out, in particular, is that many enterprises do not really use high technology to do so, but use means such as high leverage, high maturity mismatch, and even related party transactions. These methods have accumulated a large number of financial risks, which must be strictly supervised.

The core of finance is to solve information asymmetry, and the core competitiveness of financial institutions is to improve the ability of risk identification and control by reducing this information asymmetry. Fintech needs to do well in the first two aspects.

Take the information technology-based profit model, for example, where the emerging information technology-based enterprises and platforms have accumulated a large number of data that may not be available to traditional financial institutions, which can effectively identify and reduce financing risks.

For example, the mobile payment information accumulated by Alipay can help the vulnerable groups that cannot be served by traditional financial institutions to develop inclusive finance. Developing supply chain finance with JD and Wal-Mart as core enterprise suppliers to reduce financing costs of small and micro enterprises in the supply chain.

Which companies are the fintech leaders?

At present, the fintech ecosystem is also gradually maturing.

It can be divided into the following three types:

  • Companies that enable financial businesses with technology, or even directly enter the financial industry, becoming major players in the fintech market. For example, China’s “BATJ” (Baidu, Alibaba, Tencent, JD) and other large enterprises.
  • Licensed financial institutions, which provide customers with more advanced financial services through innovative technologies. For example, the big four state-owned banks have, respectively with Tencent, Baidu, Alibaba, and JD, signed a strategic cooperation agreement.
  • Some Internet finance companies, fintech companies, and network small loan companies are also more or less engaged in fintech business. Prominent ones include Ping An Finance Yizhang, Ping An Lu Finance institute, JD Finance, Baidu Finance, etc.

It is worth mentioning that financial innovation should not deviate from the needs of the real economy, and the externality and publicity of the financial industry are not comparable to other industries. All financial businesses should be licensed and regulated and should be based on serving the real economy.

With the improvement of the regulatory system, in the future, fintech companies without financial business licenses may transform to provide technology, flow diversion, deployment and implementation, and other services instead of directly providing financial products to end customers.

How FDI China can help you to open a fintech company in China

As we have seen, China is offering interesting opportunities to companies in the financial industry.

But starting a business in China can be a tedious task with the many policies that regulate company formation and the employment of staff. In-depth knowledge of the law is usually required to successfully complete a company set up in China.

Foreign financial companies that want to enter the Chinese market, can have problems related to taxes, the right kind of entity to use, hire staff, etc.

FDI China can help you go through all these aspects, thanks to our market entry solution.

This solution is divided into three stages:

  • Stage 1 – This is about employment solutions. Your company has not an entity already established in China and needs to start hiring staff to develop its operations, network, and main business assets. In this stage, we take care of labor contracts, payroll, statutory benefits administration, visa. All of this without the need of having a local entity in China.
  • Stage 2 – This is about company formation (WFOE) and office space. In this stage, the company needs to set up the legal entity and in the meantime, the staff needs to remain employed to guarantee the business activity during the formation process. We help with a business license, finding office space, opening a bank account, and tax registration.
  • Stage 3 – This is about payroll, tax, accounting, and bookkeeping. In this stage, the company is established and there is the need to transfer all the employment relationships to the new entity. We help your company managing accounting, bookkeeping, monthly payroll for your employees so that you focus only on the growth of your business.

If you are interested to know more about how this solution can help your company to expand into China, feel free to contact us or send us an email!