China’s booming fintech sector is drawing closer scrutiny from regulators who are confronted with the dilemma of how to establish better monitoring without the regulatory overreach that would stifle innovation in the sector. The People’s Bank of China (PBOC) has recently set up a fintech committee and stressed that it will adopt artificial intelligence (AI) to better monitor fintech players. “Fintech is growing really fast in China, which has become a global leader in the field. In such a big financial market, the industry has a powerful internal dynamic,” said Sun Guofeng, Director of PBOC’s Research Institute, at a public forum in Qingdao. “It poses a great challenge for regulators to control risks deriving from the disruptive emergence of the industry.” Fintech firms typically use technology, such as mobile phones and cloud computing, to provide more affordable and easier-to-access financial services to a wider population, from online loans and insurance to e-payment and crowd-funding investment. In 2016, investment in China’s fintech firms more than tripled to a record USD10 billion, surpassing the U.S. for the first time and accounting for 43% of global fintech investment, according to Accenture. Leading the deals was Alibaba’s financial-services affiliate Ant Financial, which closed a USD4.5 billion fundraising round in April 2016. The company operates the popular online payment platform Alipay. The number of mobile payment users increased to a record 459 million in 2016, up 31% from the previous year. The total transaction value of mobile payment also rose 46% to CNY157.6 trillion. Non-bank payment agencies’ online transactions reached CNY26.5 trillion in value in the first quarter, making up 3.55% of the total amount of online transactions, up 1 percentage point from the same period last year. Alipay and WeChat have become leading players in the mobile payment area, the South China Morning Post reports.

Shanghai will accelerate opening up in financial services to build an international financial center by 2020 and serve the Belt and Road Initiative, authorities told the Lujiazui Forum. Zhou Xiaochuan, Governor of the People’s Bank of China (PBOC), said the Cross-border Interbank Payment System will soon be launched in Shanghai to help internationalization of the yuan. The system provides clearing and payment services for financial institutions in the cross-border and offshore yuan business, and the first phase started in 2015 to mainly deal with trade, direct investment and financing businesses. The second phase is expected to adopt a more comprehensive clearing method to lift operational efficiency. Governor Zhou said further opening up is necessary to clean up irregularities and enhance the competitiveness of local institutions. Shanghai Mayor Ying Yong said the city will actively drive internationalization of the yuan, implement financial reforms in the free trade zone (FTZ), accelerate building an internationally oriented financial system, build a global yuan services system, and steadily drive trials for yuan convertibility under the capital account. “The next few years is the sprint stage in Shanghai’s construction of an international financial center,” Shanghai Mayor Ying Yong said. Added-value from the financial services industry contributed 17% to Shanghai’s GDP last year, making it a pillar industry for the city’s economy.

Anbang Insurance Chairman Wu Xiaohui can’t perform his duty “for personal reasons”, and has delegated his authority to other executives, the company said, after it was reported that Wu was taken away for investigation. The statement from Anbang added that the group’s business operations remain normal. The financial magazine Caijing reported that China Insurance Regulatory Commission (CIRC) officials had met with the company’s executives and informed them that Wu had been taken away, without giving detailed reasons. The Caijing story was deleted hours after it was published. Xiang Junbo, Chairman of the CIRC, was sacked and also put under investigation two months ago. Wu Xiaohui’s arrest or detention “could raise questions about Anbang’s ability to remain a major player in outbound mergers and acquisitions,” said Brock Silvers, Managing Director of Kaiyuan Capital, a Shanghai-based financial advisory firm.

Analysts are worried that Wu’s disappearance could lead to a liquidity crunch that infects the wider industry. Wu’s case could undermine a widely-held public perception of Anbang as one of China’s most resourceful and powerful companies, according to Guo Zhenhua, Dean of the Insurance Department at the Shanghai University of International Business and Economics. “The most worrying issue would be an intensive cancellation of insurance policies which would severely weigh on Anbang’s cash flow,” he said. The company has relied heavily on selling high-risk, short-term insurance policies to beef up its fund for takeover bids. Anbang Life Insurance, the flagship of Anbang Insurance Group, reported a solvency ratio of 129% by the end of the first quarter, a sharp drop from 290% in the same period of 2016, but still above the 100% regulatory red line. Anbang has been at the forefront of developing and promoting short-term, high-yield insurance policies, known as universal life insurance and similar to wealth management products, which in turn has fueled a spending spree by the firm both in China and abroad in the past few years. Publicly available information shows Anbang holds major stakes (above 5%) in eight firms listed in Shanghai, Shenzhen and Hong Kong.

The China Insurance Regulatory Commission (CIRC) has been taking stringent measures to curb the risky, short-term products pioneered by Anbang and favored by insurers since the high-profile dismissal of its former Chairman Xiang Junbo in April. Xiang himself had been an active promoter of the universal life products. On May 5, Anbang Life was prohibited from issuing new products for a period of three months, after the CIRC found one of its annuity products had “violated the regulator’s rules and disturbed market order”. Anbang held a 3.4% and 5.3% share of the national insurance premium market in 2015 and 2016, respectively. Its market share of all investment-type products was much higher at 6.4% and 19.4% in those two years. The company’s total assets are currently worth about CNY1.97 trillion. Anbang, a little known insurer when it was founded in the Chinese capital in 2004, has become one of the country’s largest conglomerates in a little more than a decade. In 2014, Anbang acquired the Belgian insurer FIDEA Assurances, and bought the Waldorf Astoria hotel in New York.

Connectivity within the Chinese banking system is growing, increasing financial contagion risk across the sector as a whole, if any companies were to suffer serious distress, according to a study by Everbright Securities. Joint-stock commercial banks, as well as some city commercial banks, account for 40% of such “interrelated assets”, which grew at a compound annualized growth rate of 23% through 2014-16 to reach a value of CNY40 trillion. At the same time, many of these banks are operating from a weak capital base and have high leverage, the report said. Industry observers have long been concerned about the true level of capital buffers at many of China’s smaller banks. Everbright now suggests that including interbank and off-balance-sheet lending, the tier 1 capital adequacy ratio dropped to 9.33% by the end of 2016, down from the official 11.25% and that banks now need about CNY2.3 trillion of additional funding to cement their capital bases. It names banks such as Industrial Bank, China Minsheng Bank, SPDB, Citic Bank, and city commercial banks such as Shanghai Bank, Nanjing Bank, Hangzhou Bank, Ningbo Bank and Beijing Bank. The tier 1 capital ratio at some of these banks has now hit the type of levels “reached by western institutions, in the run-up to the global financial crisis”, the report says. “The ratio rose before 2014 due to implementation of the Basel III accord. But since then it declined to 5.31% by the end of 2016, the South China Morning Post reports.

Business fees across China will be cut, the Chinese government has decided. Among the measures was a reduction in construction assurance deposit requirements and the cancellation of an industry restructuring charge that is ultimately levied via power bills. An industry oversight charge levied on banks and other financial institutions will also be scrapped. The Chinese government promised to slash business costs by CNY1 trillion this year. The Ministry of Finance is expected to publish a list of the administrative charges levied by central and local governments on its website before July.