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Investment, Incentives, & Institutions: The 3 ‘I’s Driving Chinese Fintech Innovation


China is pursuing top foreign talent and investment to strengthen its fintech industry. The industry offers easy access to capital and supportive regulation that provide substantial market potential for ambitious market entrants. Despite cultural barriers and distinct consumer preferences, foreign startups with a proper China strategy can receive many of the same incentives and opportunities for success as domestic competitors.

What does fintech attempt to solve in modern banking?

Fintech has become a household word over the past several years – and for good reason. In 2018, five fintech startups attained “unicorn” status while the industry attracted US$111.8b of total global investment. In 2019, new unicorns nearly quintupled to twenty-four while total global industry investment increased by 21% to US$135.7b.

Financial technology, better known as “fintech,” is a term used to describe a class of emerging technologies that seek to improve upon inefficiencies within the financial system. Fintech has significantly broadened in scope since its roots in the mid-1800s as the recent digitalization of financial services and widespread development of the digital economy has exposed nearly all facets of finance to technological disruption. Modern fintech focuses on smoothing the remaining flaws in the banking system, such as expanding financial services accessibility, modernizing financial systems & infrastructure, improving consumer protections, and more.

With the financial industry ripe for disruption, innovative startups are scanning the field for their next opportunity. According to a 2017 report released by PWC, “A huge chunk of incumbent financial institutions (88%) believe that part of their business will be lost to standalone fintech companies over the next 5 years.” Investors have recognized the market opportunity that fintech presents and are flooding the industry with capital.

China has been a driving force in the global fintech environment. From fintech investment totals to fintech-specific policy frameworks, China ranks first or second across nearly all metrics – and it has been noticed. Governments across the globe are beginning to take note of China’s burgeoning fintech capabilities and robust digital economy, begging the question, ‘What has made Chinese fintech so successful?’

What differentiates China’s fintech industry?

Access to Capital

2019 saw an approximate total of US$4.48b of aggregate investment activity (VC, PE, M&A) in the Chinese fintech industry, falling short of 2018 totals characterized by the largest-ever single fundraising of US$14b by China’s Ant Financial. While funding in recent quarters has slowed due to heightened geopolitical concerns and institutional investment freezes, mid- to long-term deal growth remains positive with 5-year industry investment increasing 187% over the period of 2014-19.

Domestic fintech players have made strides in pursuing regional expansionary ambitions, with significant deal activity taking place between well-capitalized Chinese market leaders and emerging Southeast Asian startups in particular.  Alipay and WeChat Pay, backed by Chinese giants Alibaba and Tencent respectively, have predominantly focused on growing their overseas payments channels through strategic investment and M&A activity while Chinese financial institutions have been heavily investing in foreign fintech firms to qualify for local licenses.

Total Investment Activity (VC, PE and M&A) in Fintech in China

Sources: KPMG: Pulse of Fintech H2 2019, The China Guys

Investors have also been seeking investment opportunities in the domestic Chinese market. With the People’s Bank of China (“PBOC”) announcing their plans for a digital RMB, there has been a surge of institutional interest in digital currency projects, blockchain technology, and payments infrastructure.

Additionally, cognizant of the opportunities that exist in a market of over 800m internet-enabled users with 98% on mobile devices, savvy investors have begun pursuing investment opportunities in projects that enable the expansion of financial services to previously underserved populations. In particular, regulatory compliance technologies (“regtech”) using AI and machine learning to assess risk and identify fraud and wealth management technologies (“wealthtech”) improving institutions’ operational efficiency to reduce onboarding and account costs have become hotbeds for Chinese investment.

Investors are not alone in recognizing the transformative potential that fintech has on the financial industry. The Chinese government has also begun integrating fintech into their economic priorities and have placed a particular emphasis on supporting fintech development on national and local levels.

Governmental Support

Central Government

In August 2019, the PBOC announced their “Fintech Development Plan for 2019-21” (“FDP”). The plan aims to establish a framework for China to maintain its status as a global fintech leader by aligning fintech development efforts with national interests and prioritizing early integration of key technologies within the financial industry. The framework laid out six main tasks and priorities:

  1. Strengthening the strategic deployment of fintech, improving forward-looking design, identifying fintech development trends, concentrating on coordinated planning, and optimizing systematic arrangement and talent building;
  2. Identifying proper fintech applications, key breakthroughs to drive development, and adequate regulation and control of key generic technologies;
  3. Enhancing the quality and efficiency of financial services by diversifying financial service channels, enabling cost reduction, and optimizing financing services to benefit Chinese consumers and allow for the healthy and sustainable development of the real economy;
  4. Enhancing technological capabilities to prevent financial risks, properly balance the relationship between security and development, leverage fintech to identify, curb and tackle cross-market, cross-industry and cross-regional financial risks, and strengthen control of cyber-security risks and the protection of financial information;
  5. Strengthening fintech regulation by developing a system of fundamental regulatory rules, exploring innovative management mechanisms for fintech, facilitating integrated statistics for the financial sector and making financial regulation “more professional, unified and penetrating;” and
  6. Consolidating basic support for fintech while improving the ecosystem, optimizing relevant governance systems, and taking appropriate steps in the fields of technology, laws and regulations, credit services, standards, and consumer protection.

While intentionally vague, the FDP has incited action all over the country. Large companies are investing heavily in fintech R&D while some financial institutions offer preferential banking products and services for fintech firms that focus on key areas, as defined by the FDP.

Complementing the framework as defined by the FDP, the PBOC has also released plans for a digital currency solution to further internationalize the RMB. A digital RMB would provide insights for Beijing to pursue more targeted monetary and fiscal policy, additional data for a more robust social credit system, and more efficient cross-border trade. After a successful track record of development and closed trials, the PBOC has begun discussions with domestic fintech players to explore opportunities for collaboration on basic technological infrastructure and adoption channels – spurring a boom of payment infrastructure and backend service providers that have rallied to capture emerging market opportunities. From digital wallet applications and transaction analytics software to eKYC solutions and trade finance platforms, market players are answering Beijing’s call for expedited development. Local governments have also begun implementing preferential policies for fintech innovation relating to key areas of national interest.

Local Governments

In response to the central government’s increased emphasis on fintech development, local governments across the country have been initiating incentive schemes to attract companies and talent to their locale. Incentives typically span tax rebates, rent subsidies, expedited regulatory filings, and depending on locale, government-sponsored incubation. Below are a few examples of the top fintech hubs across the country.


Shenzhen is one of China’s fintech capitals, earning the designation of the “Chinese Silicon Valley.” The city is located in a special economic zone that grants companies special incentives and privileges, including lower tax rates, funding incentives, and import/export benefits. It ranks first in China for the volume of patent filings and is also the heart of the IoT manufacturing world.

The city has invested a significant amount of capital to attract top global technology talent and frequently draws top recruits from Hong Kong’s universities and markets. Shenzhen also boasts a high concentration of VCs and incubators eager to inject capital into promising fintech projects. The local government is in the midst of shifting capital investment from manufacturing to research & development in the technology sector and, as a result, offers significant incentives for fintech companies that operate within city limits.

Shenzhen is home to several leading fintech players, including PingAn Insurance Group, the country’s largest insurance and financial services institution; China Merchants Bank, China’s largest privately-established bank; and Tencent, one of the world’s most valuable technology companies that boasts significant presence within nearly every facet of the greater fintech industry.


Beijing is the political capital of China and headquarters numerous foreign and domestic MNCs. It is the central location for fintech regulators and, as such, may offer stronger access to political inroads than other cities. It has recently initiated a sandbox program that will establish a favorable environment for product development and testing and offers significant government subsidies for fintech players whose solutions align with the key areas outlined in the FDP.

Beijing also hosts the country’s top universities and provides established opportunities for collaboration between Zhongguancun, the city’s fintech development center, and over 40 universities and 200 research institutions. Zhongguancun-based firms will also enjoy preferential policies, including tax breaks, access to government grants, and unparalleled access to private funding.

Beijing is home to several leading fintech players, including: Baidu, one of the largest AI and internet companies in the world and parent to Baidu Financial Services Group; JD Finance, the financial technology arm of Jingdong; and CreditEase, a top fintech conglomerate in China.


As the financial capital of China, Shanghai offers unrivaled access to the financial industry and strong collaboration opportunities between top national universities and a burgeoning fintech industry. Shanghai is focused on transforming the city into a global fintech hub by 2025 via a series of measures including fintech incubation, preferential tax policies, and incentives to attract top talent. The city contains a Free Trade Zone akin to Shenzhen and will introduce a new regulatory sandbox within its borders to allow for expedited product and service testing for fintech companies.

Shanghai is home to several leading fintech players, including: China Unionpay, the country’s largest bank card network; PingAn’s OneConnect, one of the eight recipients of a virtual banking license offered by the Hong Kong Monetary Authority (“HKMA”); and Lufax, an online lender and wealth management group valued at US$39.4b at the end of 2019.


Hangzhou, a neighboring city to Shanghai, has recently released a development framework to become an international fintech hub by 2030. The Hangzhou government plans to focus on the development of technologies relating to big data, artificial intelligence, cloud computing, blockchain technology, and cybersecurity. To further this pursuit, the government has committed to investing US$1.6b into a blockchain-specific fund and has attracted a high concentration of startup incubators and global VC firms.

Hangzhou is home to China’s largest payments company, Ant Financial. Ant Financial is a driving force in the global fintech industry and accounted for 35% of total global venture capital investment in fintech firms in 2018.

Local governments and industry players have answered the central government’s call to prioritize fintech development as a long-term strategic growth driver. Strong access to capital and supportive governmental regulation have allowed the Chinese fintech industry to flourish on a global scale. However, with significant investment totals allocated to both startups and institutions, as well as favorable policy applied to the greater industry, it can be difficult to identify the driving force behind fintech innovation in China.

Who is driving fintech innovation in China?

Large Institutions

Large institutions have the political capital, liquidity, and operational scope to scale cutting edge technologies quickly. Not only do they drive innovation in house, but they also inject liquidity into the startup environment through strategic investment and M&A.

Hong Kong recently issued its first set of digital banking licenses. Of the eight issued, seven are at least minority-owned, if not fully-owned, by Chinese technology behemoths like Ant Financial, Tencent, Jingdong, and other industry-leading global institutions. The HKMA likely selected these companies knowing that the resulting spinoff ventures are likely to drive additional investment and spur industry development through technology partnerships, product development efforts, and substantial employment opportunities – benefitting all industry stakeholders.

On the mainland, it is typical for large institutions to establish fintech subsidiaries that allow them to internalize fintech competitiveness and export technological capabilities to smaller players. The additional operational freedom of fintech divestiture allows large institutions to enjoy the best of both worlds – the nimbleness and innovative culture of startups backed by vast resources and strong industry influence. As a result, many well-positioned fintech startups are able to start operations with a significant competitive advantage and scale to heights at unprecedented speeds.

Large institutions have a well-stocked toolbox with which they craft the Chinese fintech industry. From higher-level industry developments like collaborating with regulators to create unprecedented market advancement opportunities to lower-level methods of injecting capital and talent into the industry, large institutions are instrumental to the continued advancement and lifeblood of the Chinese fintech innovation environment.


The startup environment in China is unique. Many startups are eligible for significant governmental support – typically initiated by the central government and implemented on a local level. However, the distinction between where central government oversight concludes and local government supervision begins is not always clear, and the resulting gap generally provides Chinese fintech startups with an opportunity for heightened operational and regulatory flexibility – market attributes that reduce barriers to entry, encourage experimental business models, and ultimately improve market efficiency through increased competition and reduced regulatory intervention.

A classic example is the Chinese cryptocurrency industry. Even after the Chinese government’s ban on cryptocurrency trading, Chinese investors still accounted for ~60-80% of total global cryptocurrency investment and trading activity. Huobi, one of the largest onshore-turned-offshore crypto exchanges servicing Chinese investors, experienced a period of rapid growth where it was opening accounts for ~200k investors an hour. Similarly, despite a ban on cryptocurrency mining, many of the largest cryptocurrency mining companies are either China-based companies operating within China or have their roots in China and sell to Chinese clients.

The benefits of a regulatory hands-off approach is chiefly that emerging fintech players have the operational freedom to thrive and contribute to a flourishing fintech environment; unfortunately, users typically pay the price. The lack of regulatory oversight has led to Chinese users being subjected to some of the most relaxed user data protections in the world. While industry advancements have enabled quick and convenient financial services for consumers, most registration processes require users to surrender their rights to data privacy and allow for the third-party distribution of user data. For example, below is a sample from the online lending provider RenRenDai’s privacy policy:

“The user agrees that we can verify, use and retain the information, either user submitted, collected by us or through a partner;” “We and our affiliates and partners can make targeted recommendations about our products, services or promotions to you via email, phone, and SMS;” “Users agree that the app has the right to collect and search relative information via ‘Cookie’ or other devices.”

With easy access to user data and relatively limited regulatory clarity from the government on appropriate commercial application, Chinese startups not only have more targeted data upon which to build and sell products, but also have an external channel for quick income streams by selling sensitive user data to unregulated third parties. As Chinese consumers develop more sophisticated needs and demand increasingly unique products, China’s financial service business models increasingly rely on user data to draw data-driven insights that strengthen value chains.

Startups have been extremely competitive in leveraging resources offered by central and local governmental agencies within a relatively relaxed regulatory environment to identify market opportunities and develop innovative products through approaches unavailable to large institutions that ultimately spur innovation within the Chinese fintech industry.

Can foreign firms compete in China’s fintech ecosystem?

China is still a domestic-driven market and much of its politically-charged financial industry offers comparatively limited access to foreign players. For a foreign fintech startup to effectively scale operations, it would be advisable to eventually consider entering into a joint venture with a Chinese partner or engage a reputable professional services firm that has sufficient resources to preemptively clear any political or industry obstacles that may inhibit growth.

Regardless, China is actively pursuing top foreign talent and investment to strengthen its fintech industry. With comparatively easy access to capital and supportive central and local regulation, there are ample resources and substantial market opportunities for those ambitious enough to navigate a market defined by high cultural barriers and distinct consumer preferences. With the proper China strategy and operational direction, foreign startups can receive many of the same incentives and have the same opportunity for success as Chinese competitors.

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