?? China between past and digital future

I feel like a novel Marco Polo writing first article of my new "Fintech Journal: travel notes from around the world". We are now flying at an altitude of 10,778 meters above the the Caspian Sea returning from China to Frankfurt. A panoply of high profile international speakers gathered a few days in Hangzhou, on West Lake wonderful shores, which Marco Polo defined heaven under the sky taking inspiration from a popular Chinese idiom. I was pleased to contribute to such an inspiring cultural forum, discussing the creation of value for human civilisation in this century of digital globalisation.

The "West Lake Culture Forum" is also an important step in my professional journey, because I hosted the world wide preview of my fourth new book “Financial Market Transparency” (FMT). I dedicated 10 years of personal and professional research to the FMT, aiming to reveal the importance of human biology behind any investment process, digital interface or quantitative algorithm. I believe that the real value of innovation does not corresponds to the quality of the algorithms or technical elements, although important to differentiate among businesses. The value of innovation corresponds to the final scope of its utilisation and the biological relationship to human fundamental needs. Therefore, FMT is my humble contribution to a novel economic theory of value based on transparency, which is the key element to transform "change" into "progress".

In this regard, China offers an extraordinary laboratory for analysis due to current transition from the tight grip of communism towards a new form of capitalism, lacking sufficient regulatory counter-balance. The Chinese establishment seems to look for a new value-based reference framework to anchor the country's social and economic transformation in the 40th anniversary of “opening up” to the world. Since the banks have experienced a significant loss of reputation in the aftermath of the Global Financial Crisis, this value-driven debate is truly relevant for them and TechFin companies entering financial services like Baidu, Tencent and Alibaba. Without a clear reference to a value-based theory innovation won't be sustainable. Chinese Digital technology has allowed the Chinese society to accomplish an extraordinary journey of financial inclusion, enabling millions of mom-and-pop individuals to collect and make payments using personal QR codes on their smart phones. During the 24 hour "Single Day" shopping marathon last November 11th (corresponding to US Black Friday for online sales), Alibaba processed a staggering selling value of more than USD 31 billions using artificial intelligence analytics on its platform. Yet, President Xi Jinping defined financial risk an issue of national security during the Communist Party congress in 2017, aware of all opportunities but also the relevant economic risks.

My Fintech though leadership role at IBM has granted me a privileged point of view about the world of innovation globally. Three macro-areas can be identified: the USA have always been the champions of technology (although Cina is becoming more competitive); Europe always had a particular focus on regulation (expression of the European Commission mandate), which is important to guarantee a more balanced and transparent development of capital markets; China instead drives business model innovation, which is fundamental to generate ROI of digital transformation. Therefore, there is no better place than China to open a discussion about the role of digital change at the crossroads between old and new models for financial services, facing an impressive process of disintermediation. True said, non-regulated Chinese entities experienced dramatic business growth also because regulation was not adequate. Banks themselves could arbitrage cost of capital rules, boosting “shadow banking” operations. The Chinese government is making an attempt to reign in the excesses of this transformation, imposing the closure of almost 80% of P2P lending platforms and enforcing centralisation of digital accounts via central bank settlement, targeting BAT client deposits which totalled almost USD 100 billions in 2018 (money that Chinese citizens transfer to their digital wallets to make online and mobile payments).

Yet, what truly impressed me is another aspect of Chinese fintech transformation, which surfaced through the many conversations with friends, clients and colleagues. This is the relevance of human capital in boosting change and transformation. In particular, I hosted a strategic dialogue about artificial intelligence and education with faculty and students of prestigious Renmin University of China (I am a member of RUC Fintech Institute academic committee). Currently, 350,000 Chinese students live in the US and many of them are returning to China working in the technology industry, enriching a country which experiences a strong need for talents. A relevant contribution to Chinese economic change is linked to their capability to make investments in human capital, opening up young generations to a future of opportunities notwithstanding the many political and industrial contradictions. Something to note: the average age of Ant Financial employees (financial arm of Alibaba) is less than 30 years (here am I, playing with the Ant in Hangzhou head office, getting ready for Euro 2020 football competition).

Yet, the transformation journey of the Middle Kingdom has just started and the Chinese Fintech revolution is about to enter a second phase: the creation of open banking digital platforms. This is a crucial step for Chinese digital development on the Belt and Road initiative, which took off when a huge number of retail entrepreneurs was granted first digital access to banking services, enabling them to scale up. This step is about enabling more integrated financial solutions for small and medium enterprises, granting “Made in China” a further boost in the process of internationalisation. Given Chinese determination to excel, the western world cannot delay the process of upgrading outdated banking systems. We are not only talking about a new way of banking with clients. We are talking about enabling small and medium entrepreneurs to compete globally on a borderless digital world, and find new ways to create economic growth and wealth for families.

Stay tuned for my next article 02-2019 about my experience at World Economic Forum.

[This article firstly appeared in Italian on Bancaforte, 23 Jan. 2019]

Paolo's books can all be found on Amazon or his author's page thepsironi.com