China's Emergence as the Global Fintech Capital and Implications for Southeast Asia

China's Emergence as the Global Fintech Capital and Implications for Southeast Asia Nir Kshetri (bio) keywords China, Southeast Asia, Artificial Intelligence, Blockchain, Financial Technology [End Page 61] executive summary This essay examines the current transformation of the Chinese financial sector and the implications of Chinese financial technology (fintech) development for countries in Southeast Asia. main argument China is home to some of the world's most innovative fintech companies. Chinese fintech companies have been successful in promoting financial inclusion and integration in their home country and are attempting to replicate this success in Southeast Asian markets. The rapid development of the Chinese fintech industry can be attributed to various factors, including a high degree of technological savvy among Chinese consumers, underdeveloped banking systems, a fintech-friendly regulatory environment, and China's improving scientific and technological prowess. Chinese technology companies are also successfully exporting their programs and technology to Southeast Asia, where many markets have a comparable base for new financial technologies. Geographic proximity as well as ethnic and cultural connections between China and Southeast Asia are also major facilitators that can help Chinese fintech companies succeed in the region. policy implications • Strict data privacy laws and regulations requiring control and scrutiny of inbound foreign investments prevent Chinese firms from engaging with Western and other advanced markets. Due to the absence of these constraints in Southeast Asian markets, China's fintech firms are emerging as major competitors. • Many Chinese fintech programs perform poorly with regard to security and privacy practices, which should be an issue of concern as they gain access to new markets. • Chinese technology firms operating in Southeast Asia could be pressured by the Chinese government to carry out censorship. For example, WeChat, used for messaging, social media, and mobile payments, has been accused of censorship activities in Southeast Asia and other foreign markets. • Western and other advanced economies such as Japan must make special efforts to bring institutional changes to Southeast Asian markets for fintech products, especially in the areas of data privacy, cybersecurity, and surveillance. There is a need for closer collaboration with like-minded governments on standards and consumer awareness of privacy and surveillance risks. If consumers understand such risks, they are more likely to prefer fintech services provided by Japanese and Western firms. [End Page 62] China has grown into a major global financial technology (fintech) hub—a development firmly supported by the Chinese government in its national strategy.1 In 2016, fintech investment in the country was $10.2 billion, compared to $9.2 billion in North America.2 By 2018, the total investment in the Chinese fintech industry amounted to $25.5 billion, which was 46% of the global total.3 This rapid development is especially evident in the mobile payment (m-payment) sector.4 In 2018, the volume of China's m-payment transactions was $41 trillion compared to $115 billion in the United States.5 A survey conducted in the first quarter of 2019 found that 95% of Chinese online consumers had used m-payments at least once in a three-month period, and 98% of the country's urban consumers with smartphones had used m-payment.6 An average user made four transactions per day. By comparison, only a fifth of the U.S. population had ever used m-payment as of 2018.7 China is also home to some of the world's most innovative fintech companies. In the 2018 Fintech 100 report of the world's leading firms, Chinese firms Ant Financial Services Group (the financial affiliate of Alibaba Group Holding Limited) and JD Finance ranked first and second, respectively. Du Xiaoman Financial, owned by the search engine Baidu, ranked fourth.8 [End Page 63] This rapid development in the Chinese fintech industry can be attributed to several factors, including a high degree of technological savvy of Chinese consumers, an underdeveloped banking system, and a fintech-friendly regulatory environment. No less important is China's improving prowess in science and technology. A 2017 Economist report noted that the country could be a "close second to" or "even ahead of" the United States in developing artificial intelligence (AI), which is emerging as the driving force in the development...