The development of inclusive finance has been an important measure that is vigorously promoted by the Chinese government in recent years. The underlying motivation is to provide more convenient and accessible financial services for its domestic market. Since the development of inclusive finance in China is closely related to the internet and digital technology, it is marked as the brand of internet finance.
Looking back on the themes of the International Forum for China Financial Inclusion (IFCFI) over the years, we are able to observe the development track of Chinese-style inclusive finance. From 2015 to 2018, the themes of IFCFI were "Good Finance, Good Society", "New Technology, New Strategy", "Capacity Changes the World" and "Tackling the Last Mile" respectively. These themes range from the vision inspired by the benefits of digital finance, which provided a beautiful blueprint for the Chinese government and market, to the emphasis on the promotion of digital technology for inclusive finance, following that, the ambitious ambitions of Internet tycoons to lead the world internet industry, and finally the challenge of trying to provide financial services in remote mountainous and poor areas. These themes highlighted the problems in the development of a Chinese-style inclusive finance under the technology of the internet.
However, the trend appears to have changed in 2019. This year, the theme of IFCFI has changed from the massive development tone in the past to the "Inclusive, Healthy and Responsible", which actually points out the defects exposed in the development of Chinese inclusive finance; unhealthy and irresponsible behavior has caused serious financial risks and social problems in the inclusive finance field. To some extent, the "IFCFI 2019" held recently in Beijing almost became a reflection and criticism-fueled meeting on digital finance/Internet finance, with several important participants criticized the problems in the development process of inclusive finance.
Former Chinese central bank governor Zhou Xiaochuan said on the IFCFI that the issue of Peer-to-peer (P2P) lending is an important lesson of inclusive finance in China. P2P lending is motivated by inclusive finance, but in some aspects, it violates the basic rules of financial health, sustainability and regulation, and thence creates large-scale problems in its wake. Zhou Xiaochuan pointed out that while seeing the enthusiasm of the emerging technology industry to engage in inclusive finance, we should also see that there are a lot of enterprises that only emphasize the good aspects of inclusive finance, and do not pay full attention to the risk and vulnerability, so there will be certain problems in such inclusive finance models. Financial institutions should avoid "going astray" amid the rapid development of science and technology in society. Some financial institutions, including some private financial institutions, have been eager for quick success and have paid a heavy price for their wrong conduct.
As a current central bank official, Yu Wenjian, director of the central bank's financial consumer protection bureau, has criticized the excessive use of digital technology in the field of finance. He said the widespread use of digital technology is indeed an important reason for disruptive changes to take place in inclusive finance, but we should also bear in mind that digital technology is a double-edged sword. Irresponsible digitization will magnify or spread risks and cause losses to financial consumers. From the perspective of the digital divide, "many consumers who were originally excluded from finance are drawn into the financial inclusion through digital inclusive finance, but they may once again be excluded due to the irresponsible use of digital technology".
The report released by IFCFI this year also believes that financial health is a basic requirement for inclusive finance, but the financial risk issues present in P2P financing in the last year or two has shown its unhealthy side. On one hand, the P2P financial platform has its own defects, and on the other hand, it is caused by the unhealthy financial investment behavior of financial consumers. These two aspects have become the key link of financial health and need to be paid careful attention especially in the development of inclusive finance.
These criticisms on the development of digital finance/Internet finance are post-mortem comments and reflections. The policy is prone to great changes in national development, which obviously has a profound negative impact on China's economy. Post-mortem comments and reflections are useful for future policy adjustments, though it is still a pity that the potential risks were not fully considered before the policy implementation and the whole society has paid a heavy price for it from the perspective of public policy. Taking Internet finance such as P2P as an example, its expansion has continuously created financial risks and social risks at various levels. In recent years, illegal Internet financing cases and P2P platform default cases have been constantly exposed in China, with the amount involved in the cases going up to tens of billions of RMB. In addition, each case involved hundreds of thousands of people. At the same time, many unsecured and even inductive P2P loans have cost the lives of many young people who have been forced into solvency.
To objectively analyze any financial phenomenon, its core essence must be grasped. Chan Kung believes that internet-based finance has been described with flowery rhetoric in China, such as with financial digitalization, consumer finance, financial technology, financial innovation, inclusive finance, P2P, Internet finance and so on. Regardless of their description, the core essence is the same.
Firstly, in a society that believes in the value of "having money is status", it is not difficult to achieve a large goal of gathering funds outside the banking system by creating financial platforms or financial products. The essence of this approach is that you don't have money, but you can find a reason, make up a dream, and let other people's money be aggregated to become your own money. There are 1.4 billion people in China, so it will not be hard to create a Fortune 500 company. But the cost of such an approach is paid in reality by the Chinese society and the Chinese people.
Secondly, some Chinese financial innovation concepts have created world-leading achievements at the application level. What begs to be answered, however, is that why do such innovations have limited application development in developed countries? This is especially taking into account that their model and technology are introduced from abroad. It appears that the applied internet finance popular in China has little technological aspects elsewhere. The rise of internet giants in China largely relies on traffic and monopoly. The internet industry is characterized by allowing only one institution to make a fortune on one thing. Once such an information environment is formed, other entities are forced to follow. One should ask if this is financial innovation or rather just a scourge of economic development.
Thirdly, the policy bias in digital finance is something worth reflecting on. In recent years, many financial innovations have received the Chinese government's support. Many of them have been endorsed by government departments and financial regulatory authorities as well. It can be argued that it is precisely under the joint efforts of the government and the market players that financial innovations based on network technology have become highly popular in China. However, if the relevant parties understood that there are problems in this, why would they still provide the support? Judging from subjective motives, some departments and institutions do not measure the risks of digital financial innovations from the society's point of view. One of the possible motives is that these relevant parties hope that by supporting financial innovations, the economy will be more invigorated. In addition, some of the parties could be seeking for business partnerships. However, this is not so much about finance, but rather political finance. One would wonder how the situation of social unrest would become if such financial innovations are executed first and regulated later.
Fourthly, "financial innovations" have weakened China's national security. Chan Kung pointed out that there are a large number of "financial innovations" in China, which includes internet finance, Big Data, online fundraising, online transactions and online banking among others. All of these financial innovations are internet-based. However, one has to bear in mind that the basic principle of the internet is openness. From the day the internet was born, it is impossible to achieve absolute security. China has placed a huge emphasis on national, financial, and social security, yet such huge amounts of financial resources are placed onto internet with fragile security. This is something that China needs to look into.
Lastly, digital financial innovation has substantially reduced the domestic credit level in China. Various network innovations may look great on the façade, but this is the result of the participation of the academic circles. In recent years, the occurrence of risks has shown that many of the major players in the digital finance are risky businesses and some of them have even participated in deceptive activities. They abused the state's support policies and attitudes toward financial innovation, committed financial frauds and substantially reduced the Chinese domestic credit levels. The relevant regulations in China are still lagging behind in handling such industrial systems and are not able to constrain these financial organizations. That is to say, the finances look ideal on the micro level but on the macro level, it is actually out of control. Much of these financial innovations were initiated by the Financial Bureau but they often ended up being handled by the Public Security Bureau.
Final analysis conclusion:
Criticizing digital financial innovation in China requires courage because the stakeholders involved consist of too many different people and institutions. What we feel still needs to be pointed out is that many of the financial technology and financial innovations in China are actually contributing to the Chinese version of the bubble economy. This bubble economy, which used to be dominated by real estate, has now changed to become dominated by so-called financial innovations and digital finance technologies.
