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In 2008, Alibaba founder Jack Ma famously declared, “if the banks don’t change, we will change the banks.” His words sparked an entrepreneurial renaissance in China’s fintech industry. ‘Fintech’ (金融科技), a portmanteau of financial technology, refers to the application of new technologies to “improve and automate the delivery of financial services.” Since Ma’s pronouncement, mainland China has produced eight fintech ‘unicorns,’ collectively worth 214.6 billion USD. Although each of these companies works to reimagine a different aspect of banking, on the whole, Chinese fintech has two objectives: to maximize the economic potential of China’s banked, while integrating the country’s remaining unbanked. This piece profiles some of the fintech unicorns engaged in this mission — specifically within two sectors, lending and payments — and explores the global implications of their innovation.

 
Empowering China’s Banked
The first half of China’s fintech strategy is to maximize the economic potential of China’s banked.
 
Lending
The largest of all Chinese fintech unicorns, Jack Ma’s Ant Financial (“Ant”) is breathing new life into an outdated lending sector. 39.4% of Ant’s revenue comes from its lending platform, CreditTech, which “addresses the unmet credit demands of unserved consumers and small businesses in China.” Specifically, it leverages Ant’s AI algorithms to more accurately identify default risks and “compress lending costs.” This technological insight allows CreditTech to service individuals and ventures that would otherwise appear too risky to traditional banks.

Lufax is a peer-to-peer (P2P) lending marketplace that matches borrowers with investors. P2P implies that users enter into an agreement with one another, not the company. Lufax simply collects a 4% commission on the total loan for arranging the transaction. Though perhaps riskier for investors, Lufax nevertheless solves a key limitation in the lending sector: capital supply. After all, centralized lenders like Ant can only underwrite so many loans. However, with Lufax, anyone can be a bank. Its decentralized system renders every Chinese saver’s excess deposits available for investment. This fintech breakthrough marks a tremendous democratization of lending services, which until now, had been monopolized by China’s commercial banks, and by extension, the CCP.
 
Payments
China’s innovation in the payments sector is as impressive. Whereas in the U.S., credit cards are the preferred non-cash payment method, in China, ‘e-Wallets’ reign supreme. e-Wallets, as their name suggests, are digital wallets that interact seamlessly with the payments environment. Like regular wallets, they consolidate various payment methods: cash, credit, debit, and more.

China’s e-Wallet space can best be characterized as a duopoly, split between Ant and Tencent. Ant’s product, Alipay, leads slightly with 54.5% market share. The payments giant has 785 million monthly active users and handles upwards of 175 million transactions a day. Tencent’s equivalent, WeChat Pay, comes in at a close second with 39.5% market share. That said, WeChat Pay enjoys one significant advantage over Alipay: compatibility. Unlike Alipay, which is a standalone product, Chinese consumers depend on WeChat for a range of services, from shopping, to food delivery, to ride-hailing. Once in the app, users are unlikely to inconvenience themselves with an external payment method like Alipay.

Even if Alipay and WeChat Pay are industry competitors, from a Western perspective, they represent a united force. Combined, the two e-Wallets processed 20.5 trillion USD in 2016. For reference, PayPal only processed 354 billion USD in 2016. China’s dominance in the e-Wallet space will soon have global implications, with e-Wallets predicted to become the leading payment method globally by 2023.

 
Integrating China’s Unbanked
The second half of China’s fintech strategy is to integrate its remaining 225 million unbanked.
 
In terms of lending, unicorn WeBank specializes in “inclusive finance.” Founded in 2014 by Ant’s rival, Tencent, WeBank provides loans to low-income individuals with little-to-no borrowing records. In fact, 8.2 million of its users had no prior credit. By the numbers, WeBank’s average loan is 8,000 RMB (1,215 USD), the average borrowing period is 52 days, and its self-reported delinquency rate is 0.64%. (U.S.-based Lending Tree’s delinquency rate is 3.3%.) WeBank prides itself on its industry-low borrowing fees: over 70% of borrowers pay less than 100 RMB (15 USD) in interest. As for payments, e-Wallets’ ability to send and receive money via mobile phone makes them perfect for rural unbanked people, who could be miles from the nearest payments terminal.

China is already the largest economy in the world. Integrating the country’s 225 million unbanked — 16% of the total population — would boost its GDP by trillions. This prospect holds not only financial merit, but political significance as well. The World Bank estimates that there are an additional 1.5 billion unbanked beyond China’s borders. Chinese fintech is uniquely positioned to service this demographic. After all, the challenge of delivering financial services to an unbanked farmer in Gansu isn’t all that different from reaching one in Niger or Yemen. As one Tech in Asia reporter notes, “the entire financial system could be due for an overhaul, and China is right at the forefront.”
 
Conclusion
Where exactly China’s fintech revolution will lead is not yet wholly clear. What is clear, in the words of Dr. Julian Gruin, is that “the image of China’s financial system as deeply repressed and dominated by a few large state-owned commercial banks is rapidly becoming outdated.” In its place, a new, decentralized fintech ecosystem is emerging — one better poised to unlock the economic potential of China’s banked, unbanked, and foreigners alike.

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Source: CSIS, by Marko Marsans

This June, China’s Ministry of Finance has unveiled a series of Draft Amendments to its individual income tax (IIT) Laws. These proposed changes are aimed at easing the tax burden for lower-income earners in particular, while taking a tougher stance on both foreigner workers and high-income earners. Below are summarized parts of the Draft Amendments that may affect foreign in China.

The effects of the proposed changes are fourfold: 

• raise the IIT threshold
• consolidate income categories
• introduce new deductible expenses
• tighten the IIT’s overall application and enforcement

Already confirmed by the State Council, the Draft Amendments have now been published for public opinion and will undergo further revision before finally coming into effect on January 1, 2019.

If these proposals are enacted, foreign companies should pay special attention to changes affecting the timing of the tax levy on foreign employees, foreign labor costs, contract profitability, and budgeting requirements, as well as the rippling effects they have on withholding and tax equalizations.

Foreigners living and working in China will now be subject to the 183-day test—a rule that draws upon recognized international practices. This test deems a foreign individual who resides in China for 183 days or more in a year a ‘resident’ and subjects them to Chinese tax on their worldwide income.

How to tell the tax identity of foreign individuals?

Resident taxpayers

Foreign individuals reside in China ≥ 183 days (within a tax year）

Non-resident taxpayers

Foreign individuals reside in China ＜ 183 days (within a tax year）

This new 183-day-test will replace the previous five-year-rule under which a foreign individual will be subject to Chinese tax on their worldwide income if they live in China for more than five years. Previously, IIT liability contained a well-known loophole whereby foreigners could ‘reset the clock’. The amendments in effect will make it harder for foreigners to avoid paying tax on their worldwide income tax liability by removing this loophole.

The graphic below is the CURRENT calculation of taxable income of foreign individuals. Once the Draft Amendments come into effect,  this Five Year Tax Rule is no longer valid. Under the new system, a foreign individual who resides in China for 183 days or more in a year a ‘resident’ and subjects them to Chinese tax on their worldwide income.

Deductibles

For resident taxpayers, the Draft Amendments propose raising the personal deduction on comprehensive income from RMB 3,500 to RMB 5,000 per month, raising the annual threshold to RMB 60,000 per year, to take effect from October 1, 2018.

Additionally, resident taxpayers will be allowed to deduct certain additional items from the comprehensive income. These additional deductible items are categorized as ‘additional itemized deductions for specific expenditures’, which include:

• Education expenses for children
• Expenses for further self-education
• Health care costs for serious illness
• Housing loan interest
• Housing rent

For non-resident taxpayers, the RMB 5,000 per month standard deduction will also be applicable to them, to replace the current RMB 4,800 per month standard deduction.

However, the current deductible allowances applicable to non-resident taxpayers are no longer available. That is to say, the deductibles for non-resident taxpayers are very likely to be shrinking. If you don't know the current deduction and allowance, check the background below.

Background

Deduction 

Foreign individuals employed in China are eligible to a standard deduction of RMB 4,800. On top of this, there are a number of allowances that may be deducted off an individual’s income, including the mandatory Chinese social security payments for foreigners. Note: at the time of writing, not all Chinese cities have implemented social security for foreigners yet.

Permitted allowances

The Chinese Tax Bureau allows foreign staff to deduct certain “allowances” before calculating the tax burden on their monthly salary. This is something that should be discussed between an employee and employer as part of the discussion of an overall salary package. These include:

• Allowances for housing, meals, relocation, and laundry expenses
• Relocation expenses upon commencement or cessation of employment in China
• Reasonable business travel expenses and two personal trips to the individual’s country of origin
• Reasonable allowances for language training and children’s education
• The tax authorities will only permit these allowances to be deducted if they are included in the employee’s contract. The employee needs to produce an official fapiao (receipt) every month for the expenses, in addition to meeting other conditions.

Tax brackets

For comprehensive income: The lower tax brackets have also been expanded—meaning the lower tax rates are now applied on a wider range of income levels, while the higher tax brackets remain the same. Practically, this means that more people can access lower IIT rates.

For example, under the old system, an individual with a taxable income (after deductions) of RMB 10,000 per month will be subject to 25 percent of tax resulting in RMB 1,495 levy every month. Assuming their taxable income remained consistent, in a year they would pay RMB 17,940 in IIT.

Under the new system, an individual with the same taxable income will be subject to a 10 percent tax rate and will only need to pay RMB 9,480 (RMB 790 x 12 months) levy every year. Under the new system, the taxpayer would pay little over half the previous tax amount and save RMB 8,460  per year.

The formulas for calculating an individual’s tax payable are:

Monthly taxable income = Monthly income – RMB 4,800 – Allowances

Tax payable = Monthly taxable income × Applicable tax rate – Quick calculation deduction

The final revision will be coming into effect on January 1, 2019. These proposals form part of larger series of tax reforms being implemented by the Chinese Authorities in order to boost consumption amid a slowing economy. Authorities have promised to cut taxes by more than RMB 800 billion in 2018, which will have the effect of reducing government revenue by over five percent.

Still in its infant stages of development, many of the details of the Draft Amendments are yet to be released—including details of the residency rules for expatriates and elaboration on the implementation and ongoing administration of many of the rules.

If the draft amendment survives the final rounds of scrutiny, the tax burden will be alleviated for the working class of Chinese citizens. The adoption of an annual levy system and the 183-day residence rule also marks a gradual shift towards more international tax practices.

Source: 中华人民共和国个人所得税法修正案（草案), KPMG Tax Alert

In 2017 Chinese authorities begun offering tax incentives to encourage middle-class families to purchase private health insurance. Beginning July 1, individuals who buy eligible insurance products can reduce person income tax by up to 2,400 yuan a year.

The tax cuts fall under a host of reforms aimed at rethinking health care provision for the nation’s vast and aging population. For most people in China, health care means public hospitals; treatment is partly paid out of pocket and partly reimbursed through compulsory insurance provided by their employers or state pension. Reforms aim to give patients more choices and ease the burden on the public purse.

Market solutions are playing an increasing role in health care: According to state news agency Xinhua, the number of private hospitals in China more than doubled from 2010 to 2015. By the end of 2015, there were 14,500 private hospitals, accounting for 52.7 percent of total hospitals in the country. The government hopes that greater uptake of private health insurance, alongside the rapid growth of private medicine, will reduce pressure on overworked, overcrowded public hospitals.

The private health insurance sector is thriving. From 2013 to 2014, total medical insurance premiums increased 41%, from RMB112.3 billion to RMB158.7 billion, rising another 52.5% to RMB241.1 billion in 2015. According to the China Insurance Regulatory Commission (CIRC), 5 insurance companies specialize in health insurance and another 100 offer health insurance products, including 28 foreign life insurance companies. CIRC reported more than 2,300 health insurance products in the market

But public awareness of and consumer confidence in private health insurance is low, even among those who can afford it — and most of the products eligible for tax cuts under the recent policy still only reimburse treatment at public hospitals.

There are two main types of private health insurance on the mainland: The more popular products are life insurance-like critical illness policies that pay out lump sums if the policyholder is diagnosed with certain conditions. If the holder makes no claims within a set period, their premiums will be returned with interest, meaning the policy operates as a form of investment or retirement plan in addition to offering indemnity. On the other hand, health insurance policies that reimburse treatment are often seen as a waste of money, as there is no return if the holder makes no claims — though these policies typically offer more comprehensive coverage.

Only about one in 20 people in China has a reimbursement health insurance policy, according to a 2016 joint report by global business consultancy Boston Consulting Group and reinsurance company Munich Re. Though the market for private health insurance saw consistent year-on-year growth of around 31 percent between 2010 and 2015, more than 70 percent of its 241 billion-yuan value in 2015 was made up of critical illness policies. But as indemnity policies for critical illness do little to support the growth of China’s burgeoning private hospital sector, authorities are working to promote private reimbursement health insurance that covers outpatient consultations as well as inpatient treatment.

Tax incentives for purchasing private health insurance were piloted in 31 cities including Shanghai and Beijing beginning Jan. 1, 2016, but only a handful of domestic insurance companies have offered eligible products. Most of the eligible insurance products target employers rather than individuals.

The report above forecasts that the market for private health insurance in China will increase fivefold between 2015 and 2020, and that reimbursement policies will see the fastest growth. Government tax incentives can help foster the mindset that health insurance is necessary and financially advantageous: once people buy the incentivized insurance, they are more likely to research and consider other private health insurance options in the future.

Chinese private insurers

The number of foreign companies in the Chinese market is increasing, but the dominant players in China’s private health insurance market are large domestic insurers. The three largest health insurers are Ping An Health Insurance Company, PICC Health Insurance Company and China Life Insurance. China Life is the largest domestic life insurance company (and the world’s largest life insurer), with 10% of its total premium income derived from health insurance. Other large Chinese health insurance companies include Hexie Health Insurance Company, which is part of the Anbang Insurance Group and Kunlun Health Insurance Company.

Nov. 11 – An issue that frequently crops up at this time of year is the question of getting earned income out of China. As many expatriates look to leave to go home for Christmas, those piles of RMB that have been stacking up nicely begin to look mouth-watering in terms of repatriating the readies. But here comes a catch – for expatriates legitimately employed in China, and paying tax here, there is not a problem. But for those working in China’s grey economy – there is.

China employs strict currency regulations that are designed to prevent large amounts of currency moving out of the country. Your small amount may not seem like a huge deal, but if everyone moved out a few thousand dollars, it would impact upon China’s economy. The movement of illicit cash both into and out of China is known as “hot money” and it can seriously damage a country’s financial stability if not regulated. China controls and monitors the amounts of money coming into and out of the country through a mechanism known as SAFE – The State Administration of Foreign Exchange. In order to legitimately take money out of China (typically wire transfer), an application needs to be made to SAFE (your bank would normally assist with this procedure) with proof of income taxes paid in China, and details of the overseas bank account the funds are to be wired to. The onus is on the applicant therefore to demonstrate the money was legitimately earned and taxes have been paid on it. If so, the money is permitted to be repatriated and there is no daily or annual ceiling limiting the amount an individual can transfer. This should not be a problem for expatriates in China with proper working contracts, visas and tax registrations.

However, many expats in China fall into a different category. Either by design or default (Chinese employers sometimes take advantage and do not fully explain this issue), there are expatriates in China who are not properly registered with the authorities, are not paying taxes, and who have nonetheless acquired a bundle of RMB. Here, there is a problem. Firstly, such individuals cannot meet the SAFE requirements, and this becomes a block. Chinese banks will not allow you to exchange and wire overseas any amount over the RMB equivalent of US$500 for you without SAFE approval, and if there is no tax paid receipts (employers should provide this) or no work permit or visa, this route is barred.

It should be noted, though, that foreign nationals can transfer any amount under or equal to the equivalent of US$500 once per day without providing proof that the money was legitimately earned or that taxes have been paid on it. Chinese nationals are able to transfer the equivalent of US$2,000 per day into a foreign bank account, however Chinese nationals face a US$50,000 annual ceiling when exchanging RMB into foreign currencies while foreign nationals do not face such restrictions.

Under these circumstances, the only practical ways to solve this are as follows:

1. If you thought your employer has misled you over your status, you may have a case. In which case, you’ll need to find a local friendly lawyer to assist. However this may take time to resolve.
2. China does permit the traveling outside of China with up to RMB20,000 or equivalent. You may pack up to this amount and be safe (any more and you face confiscation of all the money if caught). The problem with this is that RMB is not freely exchangeable, and it may be hard to convert it when back home. Hong Kong does provide such facilities – although be warned – the exchange rate issue will be a killer.
3. If more than RMB20,000, you may divide the total up among friends to limit the amount each carries. But make sure they’re good friends!
4. If you have a Chinese friend that you trust, you can transfer the money to their Chinese bank account and they can wire a maximum of US$2,000 per day to your overseas bank account. You can also do this yourself, but foreign nationals are limited to US$500 per day.
5. If you intend to return to China, deposit the money into a bank and withdraw up to the legal amount each time you leave.
6. Convert your RMB into a saleable asset that you can convert to cash back home. China does limit the amount of goods value being exported from the country, but are less likely to question personal belongings. Buying and shipping items from a reputable Chinese fine art dealer may be a solution.
7. Next time, be aware that working in China without paying tax is illegal. It can impact on even realizing the money earned. If in doubt, get a friendly lawyer to look at your employment contract terms and ensure that hard won income can be readily – and legally – repatriated.

In terms of item (6), I can relate a recent anecdote. Admiring a hugely expensive diamond necklace in a Chinese jewelry store recently, I enquired about who was going to be lucky enough to wear it. The carefully worded reply was “Oh Sir! This necklace will never be worn.”

This article is by Dezan Shira & Associates. For further information please contact the practice at legal@dezshira.com, or visit the firm’s web site at www.dezshira.com.