VICE-chairman of the China Securities Regulatory Commission (CSRC), Yang Jiang, recently spoke out in favour of the use of regulatory fintech sandboxes, hinting at their possible use in China. This is in contrast to the traditional rhetoric of Chinese regulators, who have remained more laissez-faire over the regulation and propagation of fintech in China.

Fintech sandboxes are being operated in Hong Kong and Singapore. They are test grounds for conducting pilot trials of new financial technologies in a controlled environment, for the purposes of risk, control and compliance, before their eventual launch. Analysts have argued that the lack of such regulatory hurdles in China has allowed fintech to explode in a way that has been slower in stricter regulatory environments, such as Hong Kong and Singapore.

“In traditional regulatory practice, we should have pilot programmes. In sandbox programmes, there are trials and procedures which could help us embrace new technologies,” says Jiang, speaking at The Asian Financial Forum in Hong Kong.

“But general guidance should be set up before [launch], giving a clear expectation and guidance to the market participants. Otherwise, what is allowed and what is not allowed, is not clear to the market,” adds Jiang.

To China, serving and supporting the real economy has always been the priority of China’s finance and technology industry, as President Xi Jinping pointed out in his speech at the 19th Party Congress in October 2017.

“If the finance industry is just chasing after profits, it is not responsible for the world economy and to investors. And this is the bottom line, to serve the real economy,” says Jiang.

Chinese scholars and experts also raised concerns over the potential challenges inherent in the current regulatory setup. Currently, there are several regulators with overlapping competences, which can lead to a lack of clarity as to which regulator has responsibility in areas where responsibilities overlap.

To some, now is a good time for China to adopt a sandbox scheme, because China already has strong technology capabilities in particular areas.

“China is relatively strong in payment systems and big data analysis. Especially in the mobile payment system and online finance system, China is much ahead of the rest of the world,” adds Jiang.

Challenges still exist for Chinese regulators. Misconduct and illegal activities are still prevalent in China’s finance industry, and are especially rife among China’s online lending platforms. In December, China’s banking watchdog, the China Banking Regulatory Commission (CBRC), said it will stop giving new approvals for companies to set up online lending platforms.

“Many people claim that they have good technology. But in fact, do they really serve the real economy and fulfil requirements relating to investor protection?”, asks Jiang.

Another risk faced by regulators is the “non-human” factor in big data and AI applications. In 2013, China Everbright Securities received a 523-million-yuan (approx. US$81 million) fine for its ‘fat finger’ errors in proprietary trading, which caused chaos on Shanghai stock exchange.

“Imagine if everything is automated and intelligent, a small mistake can cause a tremendous risk which cannot be manually controlled,” says Jiang.