Ping Xie: Regulation won’t stifle Chinese innovation
We sit down with Ping Xie, Professor, People’s Bank of China School of Finance at Tsinghua University to make sense of the evolving regulatory landscape in China for platform companies, and discuss its potential impact on growth and innovation.
Since the beginning of the year, China has increased the regulation of platform companies. Why is it taking action now?
Ping Xie: A number of incidents have resulted in these measures. First, China had mostly completed its curbs of P2P lending. Second, in September last year, one of the platform companies triggered a number of regulatory concerns about fintech. Third, a ride-sharing company, which was about to list in the US, aroused concerns over data security. These three incidents resulted in the increased regulation of some platform companies. A further reason was that many parents were reporting that online education and gaming were having a negative effect on their children, and this also led the government to take action.
What future regulations do you expect to see?
Ping Xie: I believe we will see a lot more regulations. For example, payment companies will no longer be able to act as an agent and sell financial products, and there will be increased regulation around personal data privacy. Also, major platforms will be required to share traffic, allowing users to switch from Platform A to Platform B through direct links without any barriers. These regulations will definitely be imposed.
China has imposed far fewer regulations overall than other countries, especially when compared with the US and Europe. As a result, China has become home to many new and fast-changing innovations.
Ping Xie, Professor, People’s Bank of China School of Finance, Tsinghua University
What do you say to concerns that the new requirements will stifle innovation?
Ping Xie: Many people are worried about this, but I don't think something like this will happen. Why? It depends on whether a company’s innovation produces negative externalities. If the externalities of an innovation have a significant negative impact on the public interest, then regulations will be strengthened. It’s important to note that over the past 30 years of internet development, China has imposed far fewer regulations overall than other countries, especially when compared with the US and Europe. As a result, China has become home to many new and fast-changing innovations. Of course, China also enjoys another advantage. Its large population allows innovations that may not be profitable in other countries to be profitable in China. Why? Because China has a demographic dividend. However, even though there will be a lot of new regulations, new innovations will still be encouraged as long as it does not harm users' interests or produce vast negative externalities. Take online gaming as an example, games have both positive and negative side effects. However, China's regulations on games are far less strict than in many other countries.
Moving forward, I believe Chinese innovators will continue to launch their new products and services on Chinese platforms. Moreover, despite the current regulatory measures, we are also seeing new innovations emerging every day. Due to China's strong digital capabilities and young people have a powerful impulse to innovate, I believe we will continue to see a good balance between regulation and innovation.
Can China’s platform companies become global leaders?
Ping Xie: This isn't easy and there are many obstacles. The first is the language barrier, especially between Chinese and English. Second, there is the issue of data sovereignty. Most of the major countries – especially in North America, Europe and Japan – are now relatively strict in how they regulate personal data and will not allow Chinese platform companies to become very sizable in their countries. Third, when it comes to e-commerce platforms, foreign countries have imposed stricter regulations on China's platforms, especially those with payment functions. Also, with more than one billion internet users, China has a vast domestic market. Because of this, many internet platforms can make a great deal of money in China alone. In addition, China has two excellent capital markets – a domestic one and one in Hong Kong – and there are three exchanges (Shanghai, Shenzhen and Beijing), plus the Hong Kong Stock Exchange, which means Chinese platforms have access to ample liquidity in the local capital markets.
So to sum up, I think there is still a long way to go for China's platforms to become global leaders.