Comments on “Chinese Fintech Innovation and Regulation”

China has shown an impressive development of the fintech industry over the past decade or so. The fintech industry has grown fast in several areas, including mobile payments, online lending, and investment. The progress of the fintech industry has expanded access to financial services to hundreds of millions of people who could not get access to traditional financial institutions. The stunning performance of China's fintech industry has raised interesting questions: what are the key contributing factors to its success?; what is the government's role in supporting fintech development?; and is China's experience applicable to other countries?

Chorzempa and Huang (2022) provide a concise and informative analysis of China's fintech development. It also discusses how policies and regulatory measures have evolved since the advent of fintech and evaluates the government's recent crackdown on big fintech companies. It can be a useful reference for readers who want to understand the main characteristics of China's fintech industry and policy. Nevertheless, I have several comments.

First, it would be useful if Chorzempa and Huang analyze the main factors of China's fintech development more thoroughly with an empirical framework and data. They argue that China's fintech industry development since 2004 when Alibaba launched the online payment system is attributed to a number of factors including a big market size, a highly repressive financial policy, the rapid development of digital technology, and the relatively friendly approach of the authorities to fintech. To strengthen this main argument, further empirical exercises are recommended. Regarding this, a useful exercise would be to assess, quantitatively with cross-country data, the extent to which each of these key factors has contributed to the adoption and growth of fintech in China much faster than in other countries. Adopting a regression method can be helpful to investigate the role of demand and supply factors in the faster rise of fintech in China. Furthermore, it would be interesting to apply this empirical analysis to China's microdata and examine the determinants of fintech proliferation across regions in China. The Beijing University Digital Finance Inclusion Index of China's Peking University shows that despite a significant expansion of the fintech industry, there are considerable disparities across China's provinces and cities.

Second, it is necessary to carefully evaluate how the recent government crackdown on the fintech giants will affect the whole financial industry and the overall economy in the long term. Chorzempa and Huang (2022) points out that “change in the policy stance toward the Ant Group affects not just fintech activities, but also the policy enablers that will affect the whole sector.” While fostering innovation, China's lax regulation of the fintech industry in the past has created many risks and loopholes in the financial system as exemplified by the P2P scandals in 2016. Regulatory frameworks need to be strengthened to create safer and healthier environments for the fintech industry. The key challenge for regulators is balancing regulation and innovation. Recently, the Chinese government is aiming to enhance competition in the fintech market and control over market power of tech giants. This brings concerns over the Chinese government's overregulation of the private sector, undermining confidence among businesses and consumers, entrepreneurship, and innovation. As the authors point out, assessing the long-term impact of tighter government regulations on the competitiveness and productivity of the financial sector and the overall economy remains an important issue.

Another key issue is privacy protection. In China and many other countries, tech giants are accused of having too much power to use, share, and create value for their digital data. They are tempted to use vast amounts of personal information for profit. In this regard, the Chinese government's attempt to break up the data monopoly is commendable. However, simply handing over data to the government cannot solve the issue of privacy protection. Moreover, there are concerns that states may abuse digital data and technology. In fact, the aggressive use of surveillance tools and excessive disclosure of personal data during the COVID-19 pandemic have raised privacy concerns in China and other East Asian countries. I agree with Chorzempa and Huang that China's data protection regime is still work in progress. Establishing appropriate checks and balances, including the rule of law and the media, would be necessary to control tech giants and states' undue power and protect civil liberties and privacy.

Third, Chorzempa and Huang highlight valuable lessons from China's fintech success, including a flexible regulatory regime in the early stage of financial innovation, high levels of political support, and adequate control over tech giants to ensure competition. China's fintech giants have shown that they can leapfrog to new forms of finance when consumers and businesses are eager to use new financial technologies. Without the active role of the state, the dynamism of the private sector appears to be a key factor in China's remarkable performance in the fintech industry. Although state-led reform and industrialization strategies since the 1980s have acted as the driving force behind China's economic miracle, markets and entrepreneurship may play a more important role in developing the fintech industry and the overall economy in the coming decades.