China is making moves to increase regulatory oversight for online finance businesses who have played a major role in making the global powerhouse’s finance industry appear to be the Wild West.
The industry has been a source of significant embarrassment for the government, including instances of misuse of funds equating to hundreds of millions of dollars. Of course, the government could be seen as partially to blame in that state-owned banks have failed to keep pace with the online economy, and as a result, third-party businesses now control a vast majority of China’s online transactions. This has resulted in huge amounts of cash being put in the hands of businesses temporarily while transactions are processed. Those organisations can then receive guaranteed returns through short-term investments, and with the amount of money being so high, there is little chance of individual businesses being caught short. It is expected that digital platforms will now be required to hold a significant amount of cash in escrow with the state-owned banks, reducing their ability to make money off interest payments. That amount is expected to be around 25%, but analysts predict it will grow to 100% in a short period of time, destroying the practice altogether.
At the core of this is the need for the Chinese government to bring control of the economy back in the hands of state-owned banks. As a digital revolution has progressed and online finance options became more popular, transfers and transactions have been predominantly invisible to the major banks, and through this, their ability to understand their clients and be involved in their financial future has been curtailed. Not to mention of course the fact that billions of dollars worth of transaction fees have ended up in the hands of private enterprise, and that a large amount of that money will be leaving Chinese shores for the coffers of foreign investors. China will also be hoping to demonstrate to the world that its economy is robust, and even post-boom it can be relied upon as a safe port for foreign capital.