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  • Zongyuan (Zoe) Liu

The Great Leap Forward: China's Digital Payment System (Part II)

Part II: Strengthening of State Regulations in China’s Digital Payment Market

Part I of this series on China’s digital payment system discussed how and why the country skipped the credit card era, leaping directly into digitalized cashless transactions. It demonstrated that the "great leap forward" in China’s digital payment system has been driven mainly by consumer demand and technological innovation rather than government policy. Nevertheless, this article analyzes the crucial role of the state in the digital payment market: following the revolutionary changes in digital payment in China, the Chinese government and the People’s Bank of China (PBoC) have implemented a series of regulations to tighten state supervision over third-party non-bank payment institutions and the digital payment marketplace.

State regulation has been following rather than leading market and technological innovation. The first piece of regulation granting legal recognition to third-party non-bank payment services came on June 6, 2010 in the form of the Administrative Measures for the Payment Services Provided by Non-Financial Institutions (非金融机构支付服务管理办法). Beginning in May 2011, the PBoC began issuing licenses to credible third-party non-bank payment institutions, with a valid period of 5 years. Between 2011 and 2015, a total number of 270 such licenses were issued by the PBoC.

A Turning Point in Internet Finance Regulation

In retrospect, 2016 marked a critical turning point for Internet finance regulation in China. Several regulations and administrative measures were put forth and came into effect during 2016:

  1. Administrative Measures for the Online Payment Business of Non-Banking Payment Institutions (非银行支付机构网络支付业务管理办法) were announced on 28 December 2015 with an effective date of 1 July 2016.

  2. The National Internet Finance Association of China began operation (NIFA, 中国互联网金融协会). Established on 25 March, the NIFA’s mandate is to establish industry standards and promote industry self-regulation.

  3. On 24 June, replying to IMF Managing Director Christine Lagarde’s question about whether China would enhance regulation over Alipay at an IMF meeting on monetary policy in Washington DC, PBoC Governor Zhou Xiao Chuan (周小川) characterized online banking and payment as shadow banking activities using the Financial Stability Board’s definition of shadow banking. He mentioned that China was determined to implement new regulatory reform in order to fill the regulatory vacuum in online banking and finance.

  4. Shortly after Governor Zhou’s discussion with Christine Lagarde, the PBoC implemented an unprecedented wide range of investigation. Within one month, it fined seven third-party payment institutions, three of which were issued fines of more than RMB 10 million. From January to August 2016, a total of eighteen institutions were fined by the PBoC.

Further Enhancement of Regulation

Since 2016, China has further enhanced regulation and supervision of third-party payment institutions, with the intention of ensuring a competitive market. In 2017, the government applied the so-called Dual Random Checks (双随机抽查) procedure to inspect third-party non-bank payment institutions with the purpose of reducing regulatory capture and rent-seeking behaviors between the regulators and enforcement personnel. This requires that the institutions to be examined are randomly selected from the total pool of such institutions, and that the regulation enforcement inspectors are randomly selected as well. The phrase Dual Random Checks was voted one of the top-ten key words in China’s payment industry in 2017, which can be taken as an indication of its public influence. In 2017 alone, the PBoC penalized 109 non-bank payment institutions, tripling the total number in 2016.

The most recent important change has been placing the clearance of all non-bank payment transactions under the central control of the PBoC. This is stated in the PBoC’s “Notice on Migrating the Online Payment Business of Non-bank Payment Institutions from Direct Connection Mode to Network Platform Processing” (中国人民银行支付结算司关于将非银行支付机构网络支付业务由直连模式迁移至网联平台处理的通知) issued by the Payment and Settlement Division of the PBoC on August 4th 2017. This Notice requires all non-bank payment institutions to settle online payment transactions involving bank accounts through a centralized network platform called the Non-Bank Payment Institution Network Payment Settlement Platform (非银行支付机构网络支付清算平台,简称网联), with an effective date of June 30, 2018.

This platform is operated by the NetsUnion Clearing Corporation (NUCC,网联清算有限公司), the first of its kind worldwide. Its operation has been interpreted as a strong indication of the determination of Chinese regulatory agencies to strengthen supervision and regulation over third-party non-bank payment institutions. A non-bank payment institution would be able to choose between NUCC and UnionPay (the traditional state-backed clearance system). This is because the NUCC cuts the direct link between third-party payment providers and banks. The PBoC, the administrator of this new platform, becomes the intermediary for the clearance of all transactions.

With the PBoC serving as the single intermediary, individual institutions can no longer cut backdoor deals with individual banks. This may contribute to reducing the dominance of Alipay and Tenpay and creating a more competitive payment market place in China. Moreover, it makes all transactions easily traceable, removing the chances of money laundering through non-bank payment platforms among different bank accounts.

The equity ownership structure of the NUCC reveals that it is an unusual public-private partnership. In the PBoC’s Notice mentioned above, it disclosed that the PBoC and related agencies would own 37 percent equity of the NUCC, with the remaining equity shares split among more than 30 private non-bank payment institutions (for example, Alipay 9.61 percent, Tenpay 9.61 percent, Chinabank Payment 4.71 percent). This is an unusual public-private partnership because public infrastructure is seldom owned by private businesses in China. But this perhaps can be largely explained by the fact that the private non-bank payment institutions are the constructor and innovator of China’s digital payment system. Through the NUCC, it is likely that the government will be able to centrally control the information flow through the public infrastructure. This has invited some criticism against the NUCC regarding the possibility of financial privacy protection violation, anti-trust, and potential conflict with international payment and settlement rules.


Regulatory changes since 2016 indicate that the Chinese government and the PBoC will continue to strengthen supervision over non-bank payment institutions and the digital payment market. The establishment of the NUCC may create more barriers for foreign non-bank payment institution in the Chinese market. This is not necessarily because of intentional government barriers. To say the least, how the NUCC will go about harmonizing protocol differences with major international payment and settlement agencies will be a major concern for foreign non-bank payment institutions (such as VISA and MasterCard) to consider before they launch their China marketing campaign.

The centralization of clearance under a single platform administered by the PBoC fits with the Chinese government’s greater big data strategy, as financial data are perhaps the most valuable source of information on the Chinese people. On 8 December 2017, Xi Jinping highlighted the implementation of big data strategy (国家大数据战略) at a group study attended by members of the Politburo. He emphasized the importance of speeding up the construction of digital infrastructure and digital China (加快建设数字中国) to improve the country’s socioeconomic development and improve the quality of life of Chinese people.

However, as discussed in Part I, in the case of digital payment in China, regulations have been led by the market and technological innovation. A series of new and tougher rules may reshuffle China’s payment markets, but technological innovation may evolve even faster. A solution to enhancing the protection of Chinese consumers’ individual financial data privacy while maintaining the convenience of digital payment and transaction under the new centralized payment infrastructure will be produced by market competition and not designed by state-directed policy.


Zongyuan Liu is a PhD Candidate at the Johns Hopkins School of Advanced International Studies (SAIS) specializing in International Political Economy with regional expertise in Asia. Her research focuses are Asian energy security, political risk in Asia, China-Middle East relations, and China’s overseas infrastructure investment.

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