Jack Ma, the billionaire behind the e-commerce behemoth Alibaba and fintech giant Ant Group, made a stir at the Bund Summit on Oct. 14, when he blasted China's banking system and the global financial regulation system.
Some of his views were not controversial. "For good innovations, regulation should not be a cause for concern, but outdated regulation is," he said. He also pointed out a commonly recognized problem that the banking sector does not lend enough support to small businesses. However, his bold criticism of China's regulation system and banking sector prompted some to question whether the billionaire was blinded by his companies' success that to a certain degree depended on a friendly regulatory environment.
"China does not have systematic financial risk because the country has no financial system," Ma declared unabashedly. Perhaps he should ask himself this question: without a financial system, how are his Taobao and Alipay ventures able to survive?
To be fair, China has been so innovation-friendly that sometimes one is tempted to question whether supervision and regulation is lacking. Experiments such as peer-to-peer (P2P) lending and cryptocurrencies were allowed to boom before they got out of control, inviting regulatory crackdown.
Millions of Chinese suffered losses due to the collapse of P2P lending schemes, with around 800 billion yuan (US$119 billion) still owed at the end of June, according to Guo Shuqing, China's top financial regulator.
P2P platforms used money invested by the general public to lend to other citizens, and were initially tolerated by regulators as they provided an efficient and innovative way to bridge borrowers and lenders. However, it later turned out that the sector was rife with fraud, with many P2P platforms found to be Ponzi schemes that used new money to pay off existing debts.
To curb financial risk arising from another innovation, Chinese authorities in 2017 banned Initial Coin Offerings (ICOs), a nascent form of fundraising in which technology startups issue their own digital coins, or "tokens," to investors to raise funds, after cases of fraud and pyramid schemes surged.
Even though ICOs were banned in 2017, fraud schemes claiming to be fintech companies focusing on blockchain and cryptocurrencies have never totally disappeared. In August this year, police arrested dozens of executives and backbone employees of the Plus Token platform, which had attracted more than 2 million members to its pyramid scheme involving cryptocurrencies worth over 40 billion yuan.
In fact, poor regulation of financial innovations was one of the major factors that precipitated the 2008 financial crisis. On the eve of the financial tsunami, the nominal value of financial derivatives worldwide reached US$6.2 trillion, about 10 times that of the real economy. Rampant derivatization of securities, based on poor credit and regulation, led to the accumulation of massive amounts of toxic assets.
With the financial crisis still fresh in our memories, Ma attacked the Basel Accords – which contain a series of international standards for bank regulation, most notably requirements on capital adequacy of banks – as one designed by "a club of old people" and questioned whether China's "adolescent financial system" needs to follow them strictly.
Apparently Ma's views were based on the perspective of a fintech executive who believes stringent regulation will prevent his company from expanding at whatever speed he desires, just like U.S. bankers who vigorously lobbied regulators not to scrutinize their innovative derivatives in the decade prior to 2008.
Ironically, before the 2008 financial crisis, former U.S. Federal Reserve chairmen Alan Greenspan and Ben Bernanke saw innovation as a way to mitigate risks. Both believed that in case of a fall of risky assets, "the blow would be softened by financial innovation," according to Gillian Tett's "Fool's Gold." It turned out that a series of convolutedly designed credit derivatives, products of financial innovation, did not reduce risks but instead played a significant role in setting off the financial crisis. Greenspan was later accused of pursuing an anti-regulation agenda that set the stage for the biggest financial crisis in 70 years.
In recent years, financial stability has been one of the top concerns of Chinese policymakers as the country works to fend off "black swan" and "grey rhino" events – unforeseen and highly obvious yet ignored threats, respectively. China now needs innovation to make the financial system more inclusive, efficient and supportive to the real economy, as Ma has rightly advocated. However, regulation should be enhanced and perfected rather than relaxed as innovation, enabled by new technologies, is increasingly reshaping the financial industry, bringing vitality and growth along with new risks.
(The author is a deputy editor-in-chief of Shenzhen Daily.)