Digitization has become a major trend in the course of global economic development. In Hong Kong and mainland China, things are going in the same direction. Following the outbreak of the Covid-19 pandemic, digitization has been accelerating in various sectors in Hong Kong and the mainland, including the financial industry.

Already several virtual banks have been launched in Hong Kong. To attract new clients, these banks have come up with fixed deposit offers that are more rewarding than those available at traditional banks. In terms of financial innovation, the mainland is apparently several steps ahead of Hong Kong, with a number of internet giants having launched e-payment service quite some time ago. In recent years, these companies have also dabbled in online deposit products and services and have therefore become a force to be reckoned with.

Can these innovative companies bring revolutionary changes to China’s financial market? It may in the long run, but in the short term it will not be smooth sailing for them. Late last year, the IPO of a big financial innovation company was suspended. Since then, there has been no shortage of controversy surrounding online financial platforms in China. Many fintech giants have taken the initiative to withdraw their online deposit products. China has launched a new round of regulatory campaign targeting online financial institutions following the campaign targeting peer-to-peer loans. Late last year, the China Banking and Insurance Regulatory Commission said it was necessary to adopt special, innovative methods to monitor fintech giants and it described financial innovation as a”double-edged sword” that could boost market efficiency and also pose major risks. Therefore, “it is necessary to grasp the boundary of financial innovation”, it added.

Different sectors in China have their specific roles and positioning. The most important thing for investors is to understand what objectives the regulatory authorities want to achieve. Regulations on e-commerce and online shopping platforms are not that stringent. This to a certain extent can benefit more consumers, and it explains why these platforms have secured the government’s green light and have been able to bring speedy, profound changes to the market. Yet the Chinese government still worries about financial risks in the market in the short run, and the traditional banking sector continues to play a fairly significant important role in the economy. The mainland government chose to have a hand in online financial platforms at this time because it wants to keep any risk under control. Related regulatory measures are likely to be rolled out gradually. As such, online financial platforms will hardly be able to revolutionize the sector.

In Hong Kong, the scope of business of many virtual banks for now is limited to deposits and loans. They have yet to diversify into other areas such as mortgage and wealth management. Compared with the traditional banking industry, virtual banks here are still on a small scale and their future depends largely on the authorities’ regulatory policy. It remains to be seen how fintech will turn things around in the financial sector.

(Chung Sau Ha, senior portfolio manager with Allianz Global Investors )

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