China has suspended registration of new businesses with finance-related names, saying that these firms first need approvals from financial regulators. What effects will these measures have on the Chinese fintech competitive space?
The restrictions imposed are part of the Government's measures to restrict the proliferation of online financial companies. According to reports citing Caixin, a Chinese magazine, the crackdown is expected to last one year and is expected to focus on P2P lending, crowdfunding, online insurance, etc.
The reasons given for the crackdown include failure of P2P lending sites which has resulted in thousands of investors losing their money. Aggressive online financing is also suspected of fueling increase in housing prices and share prices in the past. The crackdown involves multiple government agencies and is led by the People’s Bank of China.
Ezubo aftermath
The online P2P lending platform Ezubo was one of China's largest investment frauds, resulting in 900,000 investors losing a total of $7.6 billion through a classic ponzi scheme.
The platform shut shop in December 2015 and had resulted in the Chinese regulators increasing the scrutiny on online finance firms.
Over 95% of the investment projects which were listed on Ezubo are suspected to be fake and investigations into the company are still ongoing.
Chinese regulators hate bubbles
The Chinese regulators have a strong dislike for investment bubbles, since large scale losses incurred by investors can lead to social unrest.
Unlike the laissez-faire attitude of western nations, the Chinese believe in strong regulation to prevent bubbles from running for too long.
In 2013, during Bitcoin's bull run, the Chinese regulators had implemented multiple measures including banning third party payment processors from doing business with bitcoin exchanges and barring financial institutions from processing bitcoins.
The measures had the desired effect, resulting in a cooling down of bitcoin's price.
Effect on fintech competition
The crackdown on internet finance companies could result in foreign companies, looking to set up new investment businesses, going slow on their plans. In the long run, more oversight of financial companies is likely to benefit the sector, weeding out fly-by-night operators and increasing investor confidence.
Existing large players like Alipay and Tencent are also likely to benefit from increased regulation, given their established nature and financial depth.