A Close Reading of China’s Fintech Development Plan for 2022-2025

We discuss the contents of China’s Fintech Development Plan for 2022-2025, released by its central bank, which lays out opportunities for fintech expansion, major regulatory goals for the government, and Beijing’s ambitions for advanced fintech applications and inclusive growth of the country’s fintech sector.

The People’s Bank of China (PBOC) recently released its Fintech Development Plan for 2022-2025, which seeks to further develop China’s fintech sector and drive the digital transformation of finance in the country over the next four years.

This is the second fintech development plan released by the PBOC—the first one, the Fintech Development Plan for 2019-2021, was released in 2019. While the first fintech development plan set to build “pillars and beams” for the fintech sector, the new plan emphasizes “building momentum” on the basis of “accumulation” to leapfrog the sector’s progress by 2025.

The new fintech development plan is based on China’s 14^th Five Year Plan, a roadmap for China’s social and economic development in the period between 2021 and 2025.

In this article, we provide an overview of the development of fintech in China, outline the country’s strategies and main tasks for the fintech sector in 2022-2025, and take a closer look at the key points of the new fintech development plan.

What is fintech?

Fintech, or financial technology, is a combination of the terms, “finance” and “technology”. While originally referring to computer technologies that were applied to the back office of banks and other financial institutions, fintech has grown into a catch-all term to describe any business that uses technology to enhance or automate financial services and processes.

Fintech now includes a variety of technology-enabled financial activities, such as mobile payments, digital banking, online insurance, fundraising, and investment management without the assistance of a person. Moreover, fintech also includes the development and use of cryptocurrency, although this aspect of fintech is subject to increasing scrutiny in many countries.

What is the fintech landscape in China?

In China, the development of fintech can be divided into three stages:

• Finance computerizing stage (1993—2004): The People’s Bank of China and other banking financial institutions began to digitalize their back offices and services. Typical applications include ATM, POS, bank’s core transaction system, credit system, clearing system, etc.
• Internet finance stage (2004—2016): Financial institutions or Internet companies started to build online platforms, gather massive users, and use mobile internet technology to transform traditional financial services. The asset end, transaction end, payment end, and capital end of finance are connected by technology into the same network. During this stage, some fintech businesses such as online securities account opening, online banking system, P2P lending, and mobile payment were expanded rapidly.
• Fintech stage (2016—present): Unlike the Internet finance stage, fintech is broader in scope. In addition to the Internet technology, more emerging technologies, such as big data, cloud computing, artificial intelligence, and block chain, are merged into the field of financial business to change or create new financial products or services, lower transaction costs, and improve operational efficiency. Representative applications include big data credit investigation, intelligent investment, and supply chain finance, etc.

Due to the country’s narrow coverage of traditional financial services (insufficient supply of inclusive finance, especially in rural areas) and the advanced development of Internet infrastructure, China has much to gain from the development of the fintech sector.

With the support of unparalleled scale of data usage, the once lagging Chinese fintech sector has caught up quickly to global progress.

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China is now the world’s leading fintech investor since 2018. In 2018, China’s fintech investment reached US$25.5 billion, a 900 percent growth year-on-year, accounting for over 50 percent of the global total. According to CCID Consulting, in 2019, China’s fintech sector had a market value of RMB 375.3 billion (US$59.2 billion); its fintech market size is projected to reach RMB 543.4 billion (US$85.7 billion) by 2022.

Today, fintech is an integral part of public life in China. According to the Ernst & Young Fintech Adoption Index published in 2019, the adoption rate of consumer fintech in China reached 87 percent, meaning that 87 percent of China’s digitally active population use at least one fintech service (mobile payments, online banking, insurance, borrowing, etc.) in their daily life. The adoption rate is expected to continuously grow as fintech becomes more accessible to the rural population.

What does the Fintech Development Plan for 2022-2025 say?

Main challenges faced by China’s fintech industry

The Fintech Development Plan for 2022-2025 spells out the main challenges faced by China’s fintech industry. Despite making significant achievements, the development of China’s fintech sector is believed to be unbalanced and insufficient.

Among others, the digital divide caused by the unbalanced application of intelligent technology in different regions and groups is becoming increasingly prominent (e.g., it’s not rare to see that the elder group have difficulties in applying fintech). The unbalanced intra-regional financial development still exists. The disorderly expansion of some tech giants to the financial sector has triggered antitrust investigations. The “Matthew effect” (the phenomenon that the strong get stronger and the weak get weaker) of digital development between large and small financial institutions has been on display. And more importantly, China’s performance has paled in developing key breakthrough technologies.

These challenges are key to the integration of finance and technology in the future and to promote the digitalization of the financial sector.

China’s vision for fintech by 2025

By 2025, China wants to achieve leapfrog improvement of the fintech sector, in which data’s treatment as a factor of production is fully realized, the high-quality digital transformation of the financial sector is advanced, fintech governance is improved, application of key technologies are deepened, and development of digital infrastructure becomes more advanced.

China wants to have a “digitalized, intelligent, green, and fair” fintech sector that can give strong support to the implementation of strategies, such as innovation-driven development, digital economy, rural revitalization, and carbon peak and carbon neutrality.

Main tasks set by the Fintech Development Plan for 2022-2025

The Fintech Development Plan for 2022-2025 summarizes eight main tasks for the Chinese fintech sector:

*Middle platform is an application architecture to organize re-usable business services in order to satisfy volatile user scenarios.

How to read the Fintech Development Plan for 2022-2025?

Enhancing regulatory supervision

After a long period of being hands-off in their regulatory approach, the Chinese government is now paying close attention to the balance between fintech innovation and regulation. It still wants the fintech market to grow, but in a regulated way instead of unchecked expansion.

In 2020, China started to scrutinize the internet finance industry, as a result of which Ant Group’s US$37 billion IPO was suspended. In 2021, China launched a broader campaign to crack down on the anti-competitive working of tech giants and to intensify supervision of data collection as well as privacy protection in the fintech domain. The country’s leading fintech players, including Ant Group, Tencent, and Didi Global, were all hit by fines and increased regulatory scrutiny.

In line with this trend, the Fintech Development Plan for 2022-2025 lists enhancing regulatory supervision of the fintech sector as one of eight key tasks. Among others, the plan provides that China will use technology to strengthen the supervision of fintech in compliance and risk management.

Privacy and data protection

Privacy and data protection – which dominated China’s regulatory landscape in 2021 – is also highlighted in the Fintech Development Plan for 2022-2025. The plan indicates that China will make a series of supporting regulations and policies to implement relevant provisions of the Cybersecurity Law, the Data Security Law (DSL), and the Personal Information Protection Law (PIPL) in fintech area.

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Moreover, the plan stipulates very clear targets regarding the collection, use, storage, and protection of data and personal information, which are in line with the principles set by the DSL and the PIPL.

For example, for data collection, the plan requires that “the purpose of collection and processing and scope of use of original data and derived data shall be clarified by means of public statements and user statements, so as to ensure that data collection and use shall be standardized on the premise of users’ full knowledge and explicit authorization, and excessive collection, misuse and overuse of data shall be avoided.”

For data and privacy protection, the plan proposes to “establish and improve the long-term mechanism and protective measures for the safety management of the whole life cycle of data, strictly prevent data reverse tracing, privacy disclosure, data tampering, and improper use by means of hidden query, de-labeling, trusted execution environment, and other technical means, and protect the privacy of data subjects from infringement in accordance with laws and regulations.”

To ensure the right to deletion under the PIPL, the plan proposes to “establish a historical data security clearing mechanism, use professional technology and tools to delete and destroy user data beyond the retention period in time, and regularly carry out data recovery verification to ensure that data cannot be restored.”

And if it is necessary to store the sample data, the information collected shall be de-labeled with the consent of users and transferred to the non-production database for storage to ensure that users’ privacy information is not directly or indirectly identified and effectively ensure user data security.

Low carbon and green fintech

In September 2020, China’s President Xi Jinping pledged that China would hit carbon emission peak before 2030 and become carbon neutral before 2060. To achieve this goal, no industry can just stand by, including the fintech sector.

The Fintech Development Plan for 2022-2025 proposes concrete goals to further green / low carbon objectives and this will be among four basic principles for China’s fintech development.

In addition to the integration of fintech and green financing, the plan proposes to build green data centers and systems based on advanced technologies. It provides that the power usage effectiveness (PUE) values of newly built large data centers (containing over 3,000 server racks) and super-large data centers (of over 10,000 racks) shall not exceed 1.3. And by 2025, the PUE values of all data centers shall not exceed 1.5.

PUE is the ratio of the total amount of power used by a data center to the amount of power delivered to computing equipment. It describes how efficiently a data center uses energy. An ideal PUE is 1.0. The higher the PUE value is, the less efficient the data center’s infrastructure is in energy consumption. According to statistics, currently, the PUE values of most data centers in China are above 2.2, and the average PUE value of China’s large data centers is around 1.55. There is still a long way to go to meet the targets.

Fintech in the metaverse？

Reshaping financial services with intelligence is another key task for the Fintech Development Plan for 2022-2025, which proposes that “relying on the features of 5G with high bandwidth and low delay, visual technologies such as virtual reality (VR), augmented reality (AR), and mixed reality (MR) will be deeply integrated with banking scenes to promote physical branches to upgrade to multi-horizontal, immersive, and interactive smart branches.”

This sounds like a scene in the ‘metaverse’. Once a niche concept that can be traced to the cyberpunk novel, Snow Crash, published in 1992, the metaverse has become a buzzword in the last few months and more so since Facebook rebranded itself as Meta on October 28, 2021.

To explain in lay terms, the metaverse is a virtual world that is parallel to the physical world. In the metaverse, a greater overlap of our digital and physical lives is possible – in the work, socialization, productivity, shopping, and entertainment domains – and is enabled by certain advanced technologies like VR, AR, MR, etc. Businesses, investors, and developers predict it could form the next generation of the Internet.

To be more detailed, in the next four years, the Fintech Development Plan for 2022-2025 targets to build a multimedia lightweight, interactive, and borderless omni-channel for China’s financial services. It proposes to make use of Internet of things and mobile communication technology to break through the limitation of physical networks, establish intelligent interconnection service channels among people, people and things, and things and things, and achieve seamless switching and efficient coordination among different channels.

Fair and inclusive

As mentioned earlier, one challenges faced by China’s fintech sector is the unbalanced growth among different regions and groups. The Fintech Development Plan for 2022-2025 tries to address this issue by making the fintech sector fairer and more inclusive in general.

The plan proposes to comprehensively assess the situation of small and micro enterprises by analyzing the data of enterprise operation, government administration, and finance record in order to alleviate the information misalignment between banks and enterprises and provide customized digital credit products that is suitable for production and operation scenarios of small businesses.

In the field of rural finance, with the help of technologies such as the Internet of things, satellite remote sensing, and electronic enclosures, the Fintech Development Plan for 2022-2025 wants to achieve automatic data collection for the whole agriculture chain, build trust based on traceability, and develop the capacity of intelligent analysis – to achieve precise credit granting for financing needs and increase the penetration rate of fintech in the rural area.

For special groups, including the elderly, the disabled, and minorities, the Fintech Development Plan for 2022-2025 proposes to take their special needs into account and build accessible financial products and services, such as large-character version, voice version, minority language version of products etc.

The implications

Despite the ongoing crackdown on tech giants and greater regulatory scrutiny of the fintech sector, the Fintech Development Plan 2025 indicates that fintech is a prioritized area for development in China. As mentioned earlier, through the second iteration of the fintech development plan, China wants to build momentum to achieve significant improvement in the sector’s core competitiveness by 2025. To translate this into plain language, the fintech domain is still encouraged in China and supported by the government, but China wants the sector to develop in a regulated, more balanced, and high-quality way.

Also, much of the regulatory tightening can actually be traced to the Fintech Development Plan for 2019-2021. This previous plan by the PBOC had mentioned the lack of corresponding policies and regulations to properly implement financial regulations. That plan had called for mutual recognition of different apps and barcode marks of merchants; connectivity between Alipay and UnionPay was finally achieved by the end of 2021. That is to say, China’s fintech development plan is not just a plan on paper. It actually indicates how the government will administer or guide the development of the sector in the given period.

Relevant market players are suggested to study the 2022-25 plan carefully to seize opportunities in the coming future, secure against potential incompliance, or potentially avoid what regulators consider to be monopolistic moves.

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