China’s Inclusive Experience Holds a Valuable Lesson

The roadmap in the next five years for the full development of a domestic market characterized by financial inclusion is challenging.

China’s governing system has historically been praised for having a long-term view and being able to develop a detailed and clear roadmap and an efficient monitoring system.

This year’s full session of the 13th National People’s Congress (NPC), the national legislature, together with the session of the 13th National Committee of the Chinese People’s Political Consultative Conference, the top political advisory body, had an extra political weight for representing the beginning of the 14th Five-Year Plan (2021-25), uncovering the long-term vision for the next 15 years till 2035, and the celebration of the centenary of the founding of the Communist Party of China (CPC) in July.

Premier Li Keqiang’s government work report at the opening meeting of the NPC session unveiled major targets for 2021, including a year-on-year GDP growth rate of over 6 percent and ensuring rapid economic recovery.

A case study

One of the most interesting aspects of the premier’s speech was related to the role the banking sector is expected to play in the recovery this year through multiple measures including a more than 30-percent increase in the large commercial banks’ inclusive loans to micro and small businesses.

In other words, the focus is on inclusive finance lending, making a range of banking products and financial services available to individuals who cannot access the conventional banking system because of their low income. It serves as a bridge helping people to finance activities, save money, guarantee financial support to their families and prevent everyday risks.

Last year’s historical victory on poverty is not only due to the efforts made in the last decade, including investing nearly 1.6 trillion yuan ($246 billion) in eight years, but also due to the fact that in the last two decades China has emerged as the undisputed champion of financial inclusion through innovation and digitalization of the banking system. It has become a case study for the rest of the world.

The promotion of inclusive finance through increased access to digital financial services and the rise of mobile payment apps have been the real drivers behind the historical achievement of making the financial system accessible even to rural areas. Banking services have been provided to people that previously didn’t own a basic personal account due to the lack of physical branches and the high requirements of the formal financial system.

Factors such as the rapid and constant economic growth, the high national penetration of the mobile Internet, a large e-commerce ecosystem, a well-developed payment infrastructure and supportive government regulations have all contributed to make the country a pioneer in digital banking.

In particular, the role of the government has been substantial in creating the necessary circumstances through relaxation of regulations and the creation of a more tolerant market environment. They have benefited not only the rising financial technology (fintech) firms that now offer financial services to a large number of small and medium-sized enterprises and low-income families but also long-established financial firms that have innovated their traditional business models by investing a good percentage of their profits in research and development.

Nipping risks in the bud

However, while the rapid development of the domestic fintech sector and the consequent emergence of homegrown giants have enabled China to compete on an equal footing with the Silicon Valley titans, it has also resulted in the problematic coexistence of the former with the established domestic banking sector.

The growth in both the size and influence of tech companies has necessitated intervention by the regulators to prevent inappropriate competition practices and the risk of monopolistic accumulation of resources in the hands of a few powerful players that could lead to market distortions and eventually cause systemic risks.

The authorities have therefore followed the global trend of a higher level of scrutiny for technology companies. These thriving firms have now reached every aspect of people’s daily life and hold a limitless amount of data and personal information, which has made them a dominant force that could potentially harm the interests of individuals.

The Chinese leadership clearly realizes that in tomorrow’s world, technological innovation will bring enormous advantages through a higher degree of convenience, efficiency and security, all at a fraction of traditional banking costs. But technological innovation has to be well planned and monitored considering the disadvantages it also brings.

To prevent tech firms from taking advantage of an unregulated market, the government has assumed a holistic approach that puts national social and economic stability at the forefront of its financial inclusion policies.

The COVID-19 pandemic caused incalculable damage with business closures and job losses. However, it also stressed the important role that technology has, and will have even more in the future, in terms of financial inclusion and as a fundamental pillar in the development of a nation.

China’s experience in creating a highly efficient financial inclusion model that resulted in overcoming COVID-19 with a V-shaped economic recovery and eradicating absolute poverty can offer lessons to countries that are currently at a different stage of development and want to observe how the future of finance looks like.

New trends

A post-COVID-19 world is going to look very different. Investing in the development of reliable technological infrastructure that facilitates efficient transactions and the possibility of using it to launch digital currencies will protect the economic interests of nations as well as of each single business owner through easier social distancing with no additional costs.

Developing economies in Africa, Southeast Asia and Latin America, where the world’s largest number of poor populations is concentrated, can learn from China that the goal to reduce poverty in the long term is an achievable aspiration. A partnership with Chinese fintech providers could be the key to replicate China’s successful financial inclusion model within their own borders.

The roadmap in the next five years for the full development of a domestic market characterized by financial inclusion is challenging. It will require a combination of continuous technological innovation, a well-balanced participation of banks and online lending platforms, and targeted support in terms of access to capital for companies in need and basic financial services for unbanked households.

The author is a finance professional at the Industrial and Commercial Bank of China in Beijing and a member of the China Task Force at the Italian Ministry of Economic Development.