The People’s Bank of China (PBOC) recently released its Fintech Development Plan for 2022-2025, which seeks to further develop China’s fintech sector and drive the digital transformation of finance in the country over the next four years. The new plan emphasises ‘building momentum’ on the basis of  ‘accumulation’ to boost the sector’s progress by 2025. The new fintech development plan is based on China’s 14th Five Year Plan, a roadmap for China’s social and economic development in the period between 2021 and 2025.

The term fintech includes a variety of technology-enabled financial activities, such as mobile payments, digital banking and online insurance. Moreover, fintech also includes the development and use of cryptocurrency, although this aspect of fintech is banned in China.

This article reviews the development of fintech in China, outlines the country’s strategies and main tasks for the fintech sector in 2022-2025, and takes a closer look at the key points of the new fintech development plan.

The history of fintech in China

In China, the development of fintech can be divided into three stages:

• Finance computerising stage (1993—2004): The PBOC and other financial institutions began to digitise their back offices and services. Typical applications include ATM, POS, bank’s core transaction system, credit system, clearing system, etc.
• Internet finance stage (2004—2016): Financial institutions or Internet companies started to build online platforms, gather users, and use mobile internet technology to transform traditional financial services. The asset end, transaction end, payment end, and capital end of finance are connected by technology into the same network. During this stage, some fintech elements such as online securities account opening, online banking systems, P2P lending, and mobile payments were expanded rapidly.
• Fintech stage (2016—present): Unlike the Internet finance stage, fintech is broader in scope. In addition to Internet technology, more emerging technologies, such as big data, cloud computing, artificial intelligence and blockchain are merged into the field of financial business to change or create new financial products or services, lower transaction costs, and improve operational efficiency. Representative applications include big data credit investigation, intelligent investment, and supply chain finance.

Today, fintech is a major part of public life in China. According to the Ernst & Young Fintech Adoption Index, the adoption rate of consumer fintech in China reached 87% in 2019, meaning that 87% of China’s digitally active population use at least one fintech service in their daily life. For anyone who has spent time in China and experienced the ubiquity of WeChat/Alipay, this will come as no surprise. The adoption rate is expected to grow as fintech becomes more accessible to rural populations.

What are the goals of the Fintech Development Plan?

China wants to have a ‘digitalised, intelligent, green and fair’ fintech sector that can give strong support to the implementation of strategies such as innovation-driven development, digital economy, rural revitalisation and carbon peak and carbon neutrality.

As with all Chinese government plans, it is worth reading beyond the jargon to find out what the plan actually means.

Enhancing regulatory supervision

After a long period of being hands-off in their regulatory approach, the Chinese government is now paying close attention to the balance between fintech innovation and regulation. It still wants the fintech market to grow but in a regulated way instead of unchecked expansion.

In 2020, China started to scrutinise the internet finance industry, suspending Ant Group’s US$37 billion IPO. In 2021, China launched a broader anti-monopoly campaign against tech giants and intensified supervision of data collection as well as privacy protection in the fintech domain. The country’s leading fintech players, including Ant Group, Tencent and Didi, were all hit by fines and increased regulatory scrutiny.

Privacy and data protection

Privacy and data protection – which dominated China’s regulatory landscape in 2021 – is also highlighted in the Fintech Development Plan for 2022-2025. The plan indicates that China will make a series of supporting regulations and policies to implement relevant provisions of the Cybersecurity Law, the Data Security Law (DSL) and the Personal Information Protection Law (PIPL) in the fintech area.

Low carbon and green fintech

In September 2020, President Xi Jinping pledged that China would hit its carbon emission peak before 2030 and become carbon neutral before 2060. To achieve this goal, no industry can just stand by, including the fintech sector.

In addition to the integration of fintech and green financing, the plan proposes to build green data centres and systems based on advanced technologies, putting forward clear goals for the power usage effectiveness (PUE) values of data centres. PUE is the ratio of the total amount of power used by a data centre to the amount of power delivered to computing equipment. It describes how efficiently a data centre uses energy — an ideal PUE is 1.0. The plan aims for PUEs of 1.3-1.5; the PUE values of most data centres in China are currently above 2.2.

Fair and inclusive

One of the main challenges faced by China’s fintech sector is unbalanced growth among different regions and groups. The Fintech Development Plan for 2022-2025 tries to address this issue by making the fintech sector fairer and more inclusive.

In the field of rural finance, with the help of technologies such as the Internet of Things, satellite remote sensing and electronic enclosures, the plan aims to achieve automatic data collection and improve traceability for agriculture, while also increasing the penetration rate of fintech in rural areas.

For special groups, including older adults, those with disabilities and minority groups, the plan proposes the application of accessible financial products and services, such as large-character versions, voice versions and minority language translations.

Despite the ongoing crackdown on tech giants and greater regulatory scrutiny of the fintech sector, the Fintech Development Plan 2025 indicates that fintech is a prioritised area for development in China. Through the second iteration of the Fintech Development Plan, China wants to build momentum to achieve significant improvement in the sector’s core competitiveness by 2025. To translate this into plain language, the fintech domain is still encouraged in China and supported by the government, but China wants the sector to develop in a regulated, more balanced, and high-quality way.

A version of this article was first published by China Briefing, which is produced by Dezan Shira & Associates. The firm assists foreign investors throughout Asia from offices across the world. 

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The impact was immediate, with prominent cryptocurrency wallets announcing that they would stop providing services in China. Among those were Binance and Huobi, two of the biggest cryptocurrency exchanges in the world, who initially stopped registrations of new accounts by Chinese mainland customers. While both of those exchanges were actually founded in China, both have been forced to move their headquarters out of the country.

The Chinese government officially banned financial institutions from providing services related to cryptocurrency transactions. While the ban came suddenly, it is, of course, no surprise, as China has been trying to eliminate crypto transactions in the country for years. In particular, it feels unsurprising as China has been more than willing to crack down on financial markets that have run amok in 2021, as seen with the regulations imposed on major Chinese tech conglomerates like Alibaba and Meituan.

The news ties in quite neatly with what is being called China’s “Red New Deal” in some circles, and revolves around more stringent oversight of a range of industries, as Xi Jinping apparently wants to level the playing field for Chinese citizens, and is making an example of powerful private companies and the powerful billionaire elite in order to do so.

The peer-to-peer nature of cryptocurrency makes it difficult to track, which means that it can be used for such illicit financial practices as illegal income and tax evasion, something that the country has long tried to stamp out.

The latest regulations also come at a time when China is preparing to launch its own digitised currency, the e-CNY, which stands to be a centralised currency that requires user identification, and is based on the blockchain, standing in stark contrast to the ideas behind cryptocurrency.

The history

Over the course of Bitcoin’s 12 years of existence, it has become the most valuable cryptocurrency in the world, and China had, until recently, been the single largest miner of Bitcoin in the world – owning nearly half of the world’s mining capacity. But how did crypto, blockchain and its many applications become popular in the country?

One answer is BTCC. The company was the first Bitcoin exchange created in China, founded back in 2011 by Huang Xiaoyu and Yang Linke. According to South China Morning Post, the company once claimed that it accounted for 80% of the world’s cryptocurrency trading.

That first Bitcoin exchange opened the door for Chinese residents to learn more about the technology, and in 2013, Huobi Global was founded by Leon Li and Du Jun. Today, Huobi is one of the top 10 crypto exchanges in the world, but is now based out of the Seychelles.

As Bitcoin grew in popularity, Baidu and Taobao began accepting the coin, pushing its value up 800% as speculators realised the importance of gaining a foothold in the world’s biggest market.

In April 2021, estimates suggested China was responsible for 46% of the world’s Bitcoin mining

With the increased scrutiny on Bitcoin and its multiplying value, however, the government released regulations at the end of 2013, which effectively made Bitcoin and other cryptocurrencies illegal tender. The reasoning behind this ban revolved around the fact that they were not backed by any nation or central authority and had the potential to be used to launder money. The next major upheaval occurred in 2017, when the Chinese government ordered cryptocurrency exchanges to cease servicing users in the country. This resulted in BTCC announcing that it would close down.

In the years that followed these initial crackdowns, cryptocurrency enthusiasts turned to Bitcoin mining, setting up huge mining operations in the west of China, where hydropower is cheap and easy to use. Estimates put China’s mining capacity at 46% of the world’s total as recently as April of this year.

To put this into context, according to Fortune, 328,500 Bitcoins are made globally per year. Calculating at the rate above, that means that over 150,000 coins are made in China each year, valuing approximately £6.8 billion. 

At the same time, an incredible amount of power is used to mine the coins, which in turn affects China in different ways beyond financial regulation. The amount of power used by Bitcoin miners is the same as Finland uses in one year, a prominent headline in Quartz reads.

It’s also worth noting that this most recent ban on Bitcoin mining came just a week before the government also stated that it would scale back power in a number of provinces, in order to meet power quotas for the year.

How China influences global blockchain markets

For crypto traders based outside of China, the risks of doing business in China have been clear for years. Most of the major exchanges that started up in China have already moved out of the country. The issue has always been that energy is cheap and abundant in certain parts of China and that the market is too big to ignore.

To an extent, given the fluctuations that China has caused within cryptocurrency markets, it should come as a relief for traders and crypto companies to not have to deal with China anymore.

According to Nasdaq, China’s recent crypto bans are good for Bitcoin, as it is freed from the market capitulations that China has caused over the past year, and users of the cryptocurrency no longer have to deal with a government that was never going to accept a peer-to-peer currency.

With each passage of new laws relating to cryptocurrency, coin holders have been beholden to FUD, an acronym for Fear, Uncertainty and Doubt, and a veritable killer for cryptocurrencies. According to Cointelegraph, China has caused FUD and a dip in market prices as a result a total of 19 times since 2009.

For now, ownership of cryptocurrency is not illegal in the country, and while China moves forward with its own centralised digital currency, e-CNY, it appears that crypto traders in China are moving towards the booming decentralised finance (DeFi) sector.

The e-CNY has been trial launched in cities like Shenzhen and Beijing

How the e-CNY fits into the conversation

All of the various efforts to ban cryptocurrency and bitcoin mining can be connected, in some way, to China’s effort to create the first digitised national currency in the world, the e-CNY. Many commentators believe that Bitcoin would have been seen as a direct competitor to the digital yuan, making financial regulators more willing to assert these sweeping bans on the currency.

The digital yuan is effectively a means by which the central government can digitise and track currency effectively. According to an explainer on e-CNY by CNBC, it will help mitigate the impact of illegal financial activities, with the currency easily trackable. In that sense, the e-CNY is very much the antithesis of what most modern crypto and blockchain projects are trying to be. While crypto has risen as a means to take away power from flat monetary institutions like governments, banks and insurance companies, and give the power to assert monetary valuation back to the people, the e-CNY wants to work as a ledger that has an easier time of tracking any illegal activities undertaken by its constituents.

In 2021, trials for e-CNY began in major cities like Shenzhen, Beijing and Shanghai, and there are plans to expand these trials so that the digital currency can be used for certain practical applications at the 2022 Beijing Winter Olympics. 

Besides allowing the central government to get a better handle on illegal financial activities, the successful launch of the e-CNY will make China the first country to own its own digitised currency and will be integral to the country’s efforts to internationalise the CNY. This seems to set the stage for a battle between the US and China over who will be the world’s premier currency reserve.

In essence, the heart of this conversation revolves around financial regulation; about ensuring that citizens and companies are acting legally. With its widespread ban on cryptocurrency and on Bitcoin mining, the Chinese government is finally largely free from competition, has laid out the road ahead for a transparent payments system, and moved into a competition-free era where the e-CNY can be tested within the country.

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Anyone who has spent five minutes in China recently knows that financial technology – or fintech – is massive. WeChat Wallets, Alipay, and a few dozen other systems are making financial services more efficient and accessible, and cash increasingly redundant. In ‘China’s Fintech Explosion’ (Columbia University Press), Sara Hsu and Jianjun Li argue that these systems are catering to markets that state-owned banks and an undersized financial sector do not serve amid a backdrop of growing consumption and a large, tech-savvy millennial generation. Jianjun Li is professor of finance at the Central University of Finance and Economics in Beijing, while Sara Hsu is a visiting scholar at Fudan University’s Fintech Research Center in Shanghai.

Sara Hsu

You argue that fintech has grown rapidly and been innovative in China, ‘to fill the gaps that the mainly state-owned banking sector could not fill.’ What were these ‘gaps’ and how has fintech successfully filled them?

The state-owned banks have tended to lend to large firms and state-owned enterprises, neglecting small and medium-sized firms, microbusinesses, and individuals. Smaller borrowers, who generate over half of China’s GDP, have often had to obtain funds from the curb market outside the official banking system, which is unregulated and can involve excessively high interest rates. In addition, curb market lenders often do not provide sufficient funds for individual borrowers, so borrowers must obtain funds from several sources to fulfill their capital needs.

The biggest issue in lending to small borrowers is that are considered riskier because they may lack a track record of bank borrowing and/or collateral. Fintech has provided funds for smaller borrowers who lack a credit history by using alternative data, such as phone payment records or social media attributes, to fill the gaps. The data is combined with new credit scoring models to rank smaller borrowers; hence fintech has complemented normal bank lending.

You also argue that fintech is key to China’s rebalancing towards a consumer/domestic consumption-oriented economy. How has this worked?

Fintech has helped consumers obtain loans, which has played a key role in boosting consumption. In China, the consumer lending market still remains rather underdeveloped, but it is growing, with unsecured consumer lending expanding 20% per year for the past ten years. This is essential in smoothing the consumption process and aiding the purchase of more expensive products and services, such as cars and home renovations, as China’s standard of living and cost of living continues to rise.

Due to the slowing economy in the face of the US-China trade war and coronavirus, the process of rebalancing toward a consumer economy hasn’t been as easy as it would otherwise have been. In addition, regulations on the P2P lending sector in recent years have put a dent in the growth of the fintech industry. Overall, China is rebalancing toward a consumer-led economy, and as growth picks up, fintech will continue to play a key role in funding the phenomenon.

Despite the earlier innovations of PayPal and other fintech solutions in the West, China has come to leapfrog America and Europe in the sector – both in terms of innovation, roll out and take-up. How did this happen and why?

China faced glaring gaps in finance for smaller firms and individuals, so when funding became available for these entities, it was taken up with enthusiasm. The US and other Western countries already had many resources in place for small business and consumer lending even before fintech addressed some of the remaining gaps in these areas in the West. China also had a relatively low use of credit cards, and so when electronic payments became available, they expanded quite rapidly. People didn’t have to carry cash with them as often, and this provided a convenience that many hadn’t experienced before.

China also had a relatively low use of credit cards, and so when electronic payments became available, they expanded quite rapidly

China’s innovation in fintech was supported by central government policies as well as by large internet firms like Alibaba and Tencent, which themselves participated in the sector. There was plenty of funding for fintech businesses and their innovations, and a great deal of enthusiasm for this new, booming sector.

Talented new graduates and entrepreneurs entered the industry due to the promise of profit and cutting-edge development. Therefore, human capital was widely available to produce technological breakthroughs.

Does fintech’s growth ultimately undermine the notion of a majority state-owned banking sector in China?

Fintech serves as a complement to the state-owned banking sector and will not undermine it, as the state-owned banks remain a key part of the Chinese economic and financial structure and therefore have strong government support. Due to the important relationship between government policy objectives, state-owned banks, and state-owned enterprises, the state apparatus may be reformed but is not going to disappear anytime soon.

Fintech serves as a complement to the state-owned banking sector and will not undermine it

The state-owned banks have been told many times by the government to lend to small firms but they have faced difficulties in doing so, as they were insufficiently equipped to assess small firm risks. Fintech firms, therefore, are able to fill this gap, which fulfils the government need to assist smaller entities. In addition, banks have more recently been developing their own financial technologies to assist underserved companies. In this sense, they are playing catch-up to fintech firms.

What are the opportunities for foreign fintech companies in China – on either the technical or the financial side?

China has started opening up its payments sector. Foreign payments firms have been keen to enter China’s economy, although domestic payments firms are already deeply entrenched.

Foreign fintech companies still face barriers to entry, such as an opaque application process and high competition from government-associated firms.

What is China’s fintech landscape going to look like five years from now?

I think some of the fintech firms are attempting to survive in the face of external shocks and the slowing economy. Some of them will make it and others won’t. The ones that do will rely more on new technologies such as artificial intelligence and 5G, which will help to reduce credit risks and advance the industry.

We have already seen this, especially in the peer-to-peer (P2P) lending sector before its decline. The smaller firms that had less innovation and expertise quickly exited the industry because they couldn’t compete, and the ones that remained had sophisticated credit rating and fraud tracking methods that used technologies like artificial intelligence. This process will continue down the road, especially as the new technologies are implemented and change rapidly in the near future.

Also, China’s expected sovereign digital currency will change how Chinese firms and consumers use currency and the extent to which they adopt digital wallets. That will boost the demand for fintech services. Use of 5G, combined with the Internet of Things, will bring new life to internet-connected objects and integrate fintech into the overall digital environment.

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Approaching the China market can be overwhelming, especially for small businesses. It is necessary to weigh the costs and benefits of trading in a new country and a new business context. HR, customs challenges, different business cultures, and other considerations can be a lot to work through.

However, Kevin Shakespeare, director of stakeholder engagement at The Institute of Export & International Trade, says that many of the areas that give businesses reason to pause when considering trade with China – such as inspection certificates – will soon also apply to trade with the EU. It is something that all exporting businesses will have to get used to and prepare for, so China will not necessarily be significantly more complex than any other export market.

Many of the areas that give businesses reason to pause when considering trade with China – such as inspection certificates – will soon also apply to trade with the EU

One of the most common concerns among businesses interested in China is that of intellectual property (IP) protection. St. John Moore, Chairman of the British Chamber of Commerce in China, says that for many years, IP has featured among the top three areas of concern for UK companies responding to the Chamber’s surveys. However, last year, it dropped out of the top ten, indicating that businesses operating in China are becoming less concerned with IP issues as the Chinese government implements more regulation to confront counterfeiting. “As long as businesses take a thoughtful approach to IP, it should not hold them back,” he says. The same can be said for many of the market access challenges facing businesses in China.

Companies looking to enter or expand within the China market will need to explore the different regulations, registration processes, and rights protection strategies that apply to their business, and learn about China’s unique commercial environment, including different payment methods and market leaders. E-commerce and social media both drive consumer spending and if companies are looking to produce sales in China, they must be willing to invest in understanding and building a strategy around China’s key e-commerce and social media platforms. Even if on-the-ground development in China is still a few years away, businesses should familiarise themselves with the commercial environment and look at making initial enquiries into areas such as IP now, in order to help protect their businesses later on.

Specific areas of opportunity for British businesses include green energy, legal services, education, consultancy, finance, and cross-border e-commerce. Kevin Liu, head of China and head of energy Asia Pacific for Scottish Development International, says that there are opportunities for the UK and China to draw on one another’s strengths in specific areas such as offshore wind technology, and that “China is looking towards the UK to resolve these questions.”

There has also been increasing inbound investment into the UK from China in recent years. Damon Peng, regional director, East and West China of Invest Northern Ireland, says there has been strong inbound investment in the technology and education sectors in Northern Ireland in recent years. There has also been “a dramatic increase in food and drink exports to first- and second-tier Chinese cities too.”

Kevin Liu also says that there is great potential for boosting trade between China and Scotland, as Scotland currently accounts for less than one percent of UK-China trade.

Chinese students in the UK continue to be an important factor for international investment and student visas have been a key indicator of UK-China diplomatic relations in recent years.

The British Chamber of Commerce in China’s Position Paper 2020, highlights the need for a robust, long-term strategy for UK trade with China, and suggested that China must be a priority for a Free Trade Agreement (FTA). UK products and services are well regarded by Chinese consumers, however, amid ongoing global tensions and following Brexit, there is a need for a comprehensive approach to supporting ongoing trade between China and the UK.

In addition to supporting the need for an FTA, Guy Dru Drury, the chief representative for China, North East and South East Asia at the Confederation of British Industry, says that university education is the soft power association with this exchange and a “core asset” to UK-China relations. Chinese students in the UK continue to be an important factor for international investment and student visas have been a key indicator of UK-China diplomatic relations in recent years.

The British Chamber of Commerce in China’s Position Paper 2020 also notes that British businesses are “cautiously optimistic,” when it comes to relations in a post-Covid-19 world. Whilst current events have posed temporary challenges to conducting trade with China, the paper highlights recent positive steps regarding trade, regulation, and market access for UK businesses in China. As companies around the world work on overcoming challenges posed by the global pandemic, it is important to engage with China, to read past the headlines, and act on the wealth of experience of British businesses already operating in China.

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Blockchain

Chinese leader Xi Jinping announced last month that blockchain was “an important breakthrough” and that China would “seize the opportunity” whilst detailing how the Chinese government would support blockchain research and standardisation. This is the first time a major world leader has issued such a strong endorsement of blockchain.

This comes at a time when the country prepares to launch a national digital currency following a ban in 2017 on all cryptocurrency exchanges that prevented the purchase of digital currencies with Chinese RMB. More recently government authorities in Shanghai and China’s Central Bank have formed a blockchain alliance to improve trade finance operations.

As regulation authorities around the world prepare for Facebook’s proposed cryptocurrency Libra, the Chinese government and Central Bank are taking control of what may become the world’s first national digital currency. If successful, the standardisation could influence future blockchain projects across the world.

Mobile first

The mass adoption of mobile payments has paved the way for a tech literate population, with many leapfrogging the banking system to access financial services. As with some fintech challengers in the UK, mobile first is becoming mobile only.

Altogether mobile transactions in China will total over $9 trillion a year. China has the world’s largest ecommerce market with 80 percent of e-commerce transactions being mobile. Over 55 percent of Chinese consumers have made a mobile payment compared to only 19 percent in the USA.

The WeChat mobile super-app plays a key role in the daily lives of Chinese consumers providing services such as social media, transport and news with WeChat Pay as one of the most popular payment methods. For UK fintechs integrating into the messaging app’s billion plus user ecosystem there are a significant number of challenges and opportunities.

Regulators are easing restrictions, and this is enabling fintech platforms such as Alipay and WeChat Pay to open their platforms to visiting foreigners without local accounts. Alipay said it’s letting travellers use a prepaid card service while WeChat Pay will let users connect their existing cards.

The Chinese government and Central Bank are taking control of what may become the world’s first national digital currency

Cloud computing

Cloud

Cloud services based in China are now becoming available to the rest of the world. Having digital products physically located in data centres in mainland China means that the Great Firewall will be less of a hurdle and content and services will reach Chinese consumers quicker.

In the age of digital transformation, cloud infrastructure also enables companies to turn data into actionable insight. Cloud services in China offer Infrastructure-as-a-Service (IaaS) and Platform-as-a-Service (PaaS) solutions to overseas fintech partners who want to make their services available to Chinese customers.

For highly regulated industries such as finance, cloud companies can be valuable local partners who can guide foreign organisations through the regulatory and technical challenges of moving into new territories. Amazon and Microsoft both have a presence with AWS and Azure, however domestic cloud services dominate China’s market.

According to a report by Canalys, Alibaba Cloud is the largest player in China with 43 percent market share. Meanwhile Tencent has less than 20 percent market share and AWS and Baidu are both on less than 10 percent. Chinese cloud service providers are also looking to the UK as Alibaba Cloud – with data centres in London – recently partnered with their first UK distributor.

Remittances

The macro trend of financial regulation opening in Europe is also being seen in China with fintech startups, banks and money transfer companies competing to meet the growing demand for sending money overseas. East Asia and Pacific remittances increased by almost 7 percent to $143 billion in 2018 with China having the second highest remittance rates after India.

Fintech has helped bring down payment costs and the time it takes to transfer money across borders. One of the most common uses for Bitcoin in China has been reported to be remittances using companies like Hong Kong’s Bitspark.

Initiatives taken by governments are opening up China to European fintech innovators taking a technology first approach. Regulatory bridges are also being forged through partnerships and understanding for a more connected global fintech ecosystem.

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China has long maintained strict foreign exchange controls over funds entering and leaving the country, which means that foreign investors face a series of compliance challenges before they can move funds out of the country. With the current pace of regulatory changes and with banks adopting various anti-money laundering procedures, many foreign investors are naturally concerned about their ability to move funds and, most importantly, repatriate profits from China.

Foreign investors in China are advised to use the various methods available to them to optimize the tax liability that will result from funds leaving the country. This article examines the four primary ways that Foreign Invested Enterprises (FIE) can repatriate profits from China as well as the application of transfer pricing.

Profit Repatriation (Dividends)

Dividends to shareholders are the most common method for FIEs in China to repatriate profits to foreign entities despite being a fairly costly method of profit repatriation. Companies must first pay corporate income tax (CIT) on its profits and then, of the gross income from dividends paid to overseas entities, a withholding tax of 10 percent is paid to the relevant tax authorities unless a preferential rate has been granted under a Double Tax Agreement. In addition, FIEs who wish to repatriate profits must place at least 10 percent of net profits in a reserve account, up to a specified limit, for later reinvestment in the business.

Profit repatriation is also a lengthy process. It can only begin after annual tax reports have been filed and CIT paid – usually by the end of June in the following fiscal year. If applicable, it can then take up to two months to apply for a preferential tax rate under a Double Tax Agreement and to register the application with the State Administration of Foreign Exchange (SAFE). Additionally, the company must first fully top-up the registered capital and settle any accumulated losses carried forward from previous years before it is eligible to pay dividends to shareholders.

Service fees

Another method FIEs have of repatriating profits is through service agreements. Certain functions may be carried out at the group company level, or by a related party in exchange for a service fee. These functions, such as accounting, HR, information technology, and marketing can be charged by the group company in order to repatriate funds overseas.

In general, VAT and other surtaxes must be withheld by the FIE, in addition to a 25 percent CIT on deemed profits of 15 to 50 percent which must be paid before remittance can be made outside of China. While CIT exceptions and other preferential treatment for intercompany service agreements exist, these are only available on a case-by-case basis and are subject to pre-approval by the relevant tax authorities. Businesses are advised to plan ahead.

It’s important to note that service agreements signed with foreign entities must be registered with the tax authorities within 30 days. The authorities also reserve the right to question the validity of these service agreements, scrutinising two areas in particular:

• Were services actually delivered and where?
• Were service fees calculated in accordance with the arm’s length principle?

Given their potential for misuse, service agreements between related parties have become a focus of tax authorities. It’s important that the necessary steps be taken to ensure such agreements are done in compliance with PRC law.

Royalties

Fees paid to an overseas entity in relation to the use of intellectual property are similar to service fees in that they are both tax efficient and relatively convenient for the business. As with service agreements, 6 percent VAT and 10 percent CIT must be withheld by the FIE and paid to the relevant tax authorities before remittances can be made. Royalty agreements must also be registered with the trademark bureau and detailed royalty agreements provided, including the rationale for calculating royalty fees.

It’s important that the business conducts thorough cashflow forecasts before repatriating profits in order to avoid potentially increasing its working capital in the future

Foreign Loan Interest Payments

The final method of repatriating profits overseas is through foreign loan interest payments. According to PRC law, the total investment of an FIE in China can exceed its registered working capital by between 30 to 70 percent, depending on the size of the investment. The difference between the two figures can then be registered as a foreign loan on which the FIE pays interest to its parent company at a rate not exceeding the official interest rate provided by the Bank of China. FIEs are required to withhold VAT at 6 percent and other surtaxes, as well as a 10 percent CIT on such interest payments.

Businesses can decide how much of the difference between total investment and working capital they wish to register as a foreign loan with the State Administration of Foreign Exchange.

How Transfer Pricing works

Transfer Pricing is an accounting practice that relates to intercompany payments made in exchange for good or services. Transfer pricing allows for tax savings as companies can redistribute earnings amongst groups or related parties. However, due to the potential for misuse, the tax authorities will often carefully examine both parties involved in such transactions, in particular focusing on:

• How each party benefited from the transaction
• The necessity of the services in question
• The rationale for determining the price
• In the case of royalties, how much value the company derived from using the intangible assets

Thus, it’s important that intercompany transactions are accompanied by detailed supporting evidence and are carried out in compliance with PRC law should they be challenged by the tax authorities.

Additional Considerations

When choosing methods of profit repatriation, FIE’s should consider the options available in their unique business situations, and keep in mind that the tax authorities in China reserve the right to question the validity of many of the methods discussed. It’s also important that the business conducts thorough cashflow forecasts before repatriating profits in order to avoid potentially increasing its working capital in the future should it need additional funding.

It’s also worth mentioning that China provides qualified non-resident foreign entities a special deferral of withholding tax for profits derived from resident companies in China should they be invested in industries outlined in the Catalogue of Encouraged Industries for Foreign Investment. To take advantage of the full range of profit repatriation methods available and achieve an optimal tax liability, foreign investors are encouraged to plan ahead.

The author of this article can be reached at Valur.Blomsterberg@integra-group.cn

For more information about China’s financial sector please contact Avi Nagel at avi.nagel@cbbc.org

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Callum Wade

What are Ebury’s core service?

We are a Financial Technology (Fintech) company, specialising in cross border transactions and business lending.

Our success in cross border transactions is due to the fact we provide a service to SMEs that big banks usually only reserve for their largest clients. We offer foreign exchange and risk mitigation at a fair price for companies of any size. Working with over 15 liquidity providers gives our clients access to over 130 currencies, as well as basic risk mitigation tools—including forward contracts—which means we can provide a fixed exchange rate for up to five years. Due to client demand, we can now offer currency accounts held in our client’s own name, allowing you to collect funds locally in over 20 countries. This can really help businesses expand globally at pace, as it can sometimes take upwards of six months to open a similar facility with a traditional financial institution.

We also provide business lending with an unsecured credit line of up to £3 million to fund growth. This tool has proved particularly useful when importing from Asia, as unlike most other providers, we don’t require a bill of lading to process a payment. This means we can fund any pro-forma payments such as pre-manufacture or pre-shipping deposits.

So you also provide cash flow loans?

Our trade finance product was created to help bridge the gap between the initial ordering to selling the physical goods and receiving payment. Goods can sometimes be in transit for 6-8 weeks, which can limit the cash flow of businesses that are looking to grow. The credit line is free to set up and free to have in place. It’s simply a pool of liquidity you can dip into whenever you need a bit of extra headroom and in those times of year where cash flow is not tight, you won’t incur any costs.

You recently were awarded the top USD/CNY currency forecaster globally. Is foreign exchange trading the main part of your business?

We originally came to the market in 2009 as a foreign exchange brokerage. Offering deliverable FX services and risk management to clients in the UK and the European Economic Area. Since then, we have expanded our product portfolio to give our clients access to a full suite of transactional financial services, focusing specifically on the areas where traditional banks were falling short.

However, no matter how many more products and services we develop, it is important that we do not dilute our pedigree as a top FX provider. That is why you will regularly see Ebury at the top of the forecaster league tables on Bloomberg and leading the industry in those core services that we have built upon.

What kind of clients might Ebury work with? Are they mostly SMEs dipping toes into China?

We have over 35,000 clients across four continents. As you can imagine, they come from myriad different industries and range in size from SMEs with less than 10 employees, all the way up to multinational corporates turning over billions annually. One thing that a lot of our clients share is strong links with China or at least a desire to do business there. 

For example, a client came across an opportunity to set up two stores in Mainland China through a joint venture. They needed to set up a Hong Kong entity and a bank account for that company, to accept the funds that will be used to set up these stores. They were informed by a Chinese Bank that it would take months and a substantial amount of documentation to get the account set up. With the Shanghai and Beijing stores planned to open in August of this year, time was of the essence. Furthermore, due to the funds being used to set up the stores coming from their USD account, they were concerned about high charges for the conversion into RMB.

Our success in cross border transactions is due to the fact we provide a service to SMEs that big banks usually only reserve for their largest clients

We were able to onboard the Hong Kong entity using just an online application form, proof of ID and proof of address for the signatory. USD and RMB accounts domiciled in Hong Kong were set-up on the same day. We were able to offer conversion from USD into RMB at a much sharper exchange rate than their current incumbent. The client can now send and receive funds from mainland China smoothly. With our physical presence in both London and Hong Kong we are always on call for both their Europe and Asia operations.

Can Ebury therefore help with receiving RMB from Mainland China cost effectively for business operating there?

Yes. We can help on both sides, so businesses purchasing from China and businesses selling goods or services to China. We can set up Hong Kong domiciled currency accounts for businesses who are based in the UK without them setting up a Hong Kong company. This saves a lot of hassle and cost in comparison to setting up a free trade zone entity or a non-resident account with a bank in China.

For more information on Ebury contact eleanor.stevenson@ebury.com.
For more information on the financial sector contact CBBC’s sector lead Juliet.Zhou@cbbc.org.

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In the first half of 2018, Chinese outbound foreign direct investment (OFDI) has dramatically veered towards Europe over North America. The value of completed Chinese investments was six times higher in Europe (£9.3 billion total with £1.25 billion in the UK) than in North America (£1.55 billion), according to    Baker McKenzie and Rhodium Group. This trend looks set to continue, with technology firms in particular considered the “crown jewel” of Britain for Chinese investors. According to Management Consultancy Firm Mckinsey, China’s outbound investment will resume its upward trajectory with a focus on “Made In China 2025” sectors and digital technology, areas such as Artificial Intelligence (AI) and the Internet of Things (IoT).

We find that UK SMEs are particularly attractive for Chinese institutional investors, due to the strength of “Brand Britain” and the UK’s status as a world leader in innovation

This upwards investment trend is partly due to China’s fluctuating stock market and lower real estate returns at home. China now has the second-highest number of billionaires globally and many of these are diversifying their investment portfolios to include UK assets, which are perceived to be more stable.

Investment firms, such as the newly established China Heritage, where I serve as Chief Marketing Officer, are responding to this need by helping private investors diversify their portfolio abroad. We find that UK SMEs are particularly attractive for Chinese institutional investors, due to the strength of “Brand Britain” and the UK’s status as a world leader in innovation. Due to the potential for a post-Brexit UK-China trade deal and the rocky China-US trade relationship, there has never been a more encouraging outlook for UK SMEs to raise Chinese funding.

“Along with capital, Chinese investors can provide important market knowledge and distribution capabilities, while the sheer size of the market enables companies to test and refine products with condensed timescales,” says Mark Hedley, technology lead at the China Britain Business Council.

Types of Investors and How to Reach Them

Angel Investors and High Net Worth Individual (HNWI)

Angel investors typically provide seed funding through a one-time investment or an ongoing injection of funds to industries which they understand and where they can offer value. The best way to find angel investors is by reaching out to your network and their peripheral relationships in the same industry or a complimentary line of business.

Family Offices

A single family office (SFO) is a private company that manages investments and trusts for a single family. Much of their wealth is in its first or second generation, so many families are still aggressively seeking greater returns instead of wealth preservation. SFOs are particularly common in China and many can be found through professional wealth management firms in Hong Kong and Singapore.

Government Grants and Funding

Both the UK and Chinese government routinely offer grants and funding to collaborative projects. In 2015, both governments collaborated on a £16 million fund for joint projects in energy, healthcare, urbanisation and agri-food. At Kaitlin Zhang Branding, we have helped UK clean tech firm Loowatt raise RMB 1 million (£110,000) joint funding from the Guangdong Provincial Department of Science and Technology. Keep an eye out on government websites for these opportunities.

Venture Capital (VC) Firms

While Chinese venture capital firms don’t often disclose financial information, there was a considerable uptick in financing activity during 2017, with total annual Asia funding activity increasing by 117 percent year on year, according to CNBC.

“A venture capitalist looks for a strong product or service that holds strong competitive advantage, a talented management team and a wide potential market,” according to Will Jiang, Partner at N5Capital, a Beijing VC firm and previous client of Kaitlin Zhang Branding.

Firms that are looking to establish their brand in China are particularly attractive to VCs because they like to lend their expertise to help their portfolio companies succeed through activities such as marketing and recruitment. The key to finding the right venture capital firm is by researching the firms that typically invest in your geographic location, funding series and industry. Websites such as Crunchbase and 36kr can help identify suitable firms.

Kaitlin Zhang is the CEO of Kaitlin Zhang Branding, a cross-border digital marketing agency specialising in technology and financial services. The company works with UK technology firms to establish their brands in China and support them with raising vital capital. The company also works with some of the top Chinese venture capital firms and private investors to build their brands outside of China, in addition to supporting fundraising efforts in excess of $200m USD.  

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What do you think are the most significant developments and main opportunities in China’s FinTech industry?

China’s FinTech innovation and success is certainly something we can learn from in the UK.  I lived in Beijing for almost three years, and I have to admit after returning to the UK a year ago, I still miss using my beloved WeChat wallet to buy my morning coffee.

As China prepares to celebrate the approaching Spring Festival, many people will be stocking up on red envelopes, or hongbao as they are known in Chinese, to hand out to their friends, family and colleagues. Last year over 46 billion of these were sent using WeChat – a remarkable statistic – and 43 percent up on the year before. I’m sure the coming Year of the Dog will see even more money sent using the platform – a real litmus test of the impact and take-up of FinTech in China – and hopefully, a few of my Chinese friends will remember me with their digital hongbaos.

This is an example of current and future opportunities for FinTech: the sharing, earning and linking to social media. The Big Data generated in China can be minded for future innovation and efficiencies. FinTech also has the opportunity to accelerate segments of China’s financial markets currently lagging behind Western markets. Insurance is one such are where Asia overall lags the West in penetration. InsurTech can bring value and variety to China’s market.

In 2016, investment in mainland Chinese and Hong Kong FinTech ventures totalled $10.2 billion, exceeding North America’s $9.2 billion. Alibaba has more than 550 million customers for its core offerings, and Tencent’s has nearly a billion. Taking these massive numbers into account, the question most people will ask is: what can we in the UK offer China?

The answer is mature market innovation. After all, London has been named as a world leader in FinTech, and UK based FinTech startups are seeing record-breaking investment that far outstrips their European competitors.

Developments such as the UK-China FinTech bridge announced in 2016 and that with Hong Kong will go some way to strengthening cross border collaboration and leverage global innovation.

At the City of London we are pleased to support the UK’s burgeoning FinTech scene. Working with KPMG, we recently published our Value of FinTech report. The central recommendation was to pursue a FinTech sector deal, and we offered to help convene the industry to support that.

We’ve also long seen the importance of tech hubs such as Shenzhen, and I am a regular traveller to the City. Late last year the City of London Corporation’s Policy Chairman Catherine McGuinness and I visited to speak at the CBBC Outbound Conference, and this March our Lord Mayor Alderman Charles Bowman will visit alongside a senior UK business delegation.

Back home, the Financial Conduct Authority’s FinTech Sandbox and wider Project Innovate has been a huge success for the UK and now is the time to build on it. There are also further opportunities for the UK to be a lead regulator in areas like Blockchain, AI and Big Data- not just in China, but also in Belt and Road countries- provided we can demonstrate policy and legal certainty. This opens a future opportunity for RegTech to accelerate in China.

Innovate Finance- the membership body dedicated to FinTech which now numbers over 300 FinTech firms – is seeking to build even more excellence in the sector here in the UK. Innovate Finance recognises the importance of collaboration with China.

Preparations are also underway to launch the first UK-China FinTech Awards, to attract Chinese FinTech companies with the intent to setup in the UK. Clearly there is a lot of exciting progress underway, and 2018 will see some interesting developments in this area.

What do you think are the main challenges or problems in China’s FinTech industry?  

In terms of challenges, I think the main concern for the sector is regulation and the Chinese government has made no secret of its concerns about dubious lending practices. Recently in December Chinese regulators issued a notice spelling out stricter rules for cash loans and P2P lending. And late last November they stopped issuing licences for new online small-loan companies.

Clearly a lot of firms will be affected by these controls – and the new rules are already making the market nervous. An example of this was the muted investor demand to the US initial public offering by online Chinese consumer lender LexinFinTech, which had to scale back its offering from US $500m to US $109m.

While some firms will struggle to survive this clampdown, others will continue to expand, and the battle between FinTech giants Alipay and Wechat payment will lead to more acquisitions, mergers and innovative financial models, as the tech behemoths lock horns in order to expand their customer bases both at home and overseas. Hopefully new innovators will find way to thrive.

A great example of this is the Chinese FinTech firm CreditEase lending consumers cows in a bid to reach those living in rural areas who might have limited access to credit and financing. ANT Financial is innovating in green finance by planting trees in proportion to volumes on its platform.

The investment bank Macquarie estimates credit extended by China’s FinTech firms will jump more than seven-fold by 2022 to 6.2 trillion yuan (US $940 billion), to pay for things like luxury and household goods or training and education. Clearly there’s plenty of room for expansion in the market.

In terms of challenges for foreign investors, market access is still an issue. But on this point we are seeing progress, and the further opening up of China’s financial sector to foreign businesses.

In November last year, the City of London welcomed an announcement by the Chinese Finance Ministry that it will move to remove limits on foreign ownership in financial ventures. We hope this will increase mutual exchanges, and create a level playing field for Chinese and foreign institutional investors- not only for firms in market, but also those currently considering making an entry. I also believe it will make the country’s financial market more appealing to foreign investors, including those FinTech firms in the UK looking to expand their operations overseas.

What do you think FinTech companies can do to overcome these challenges and succeed in the FinTech market?

I think the keyword here is caution. As I said before, with the recent regulatory clampdown we are bound to see a few firms in China changing their business models or falling out of the market altogether. But this doesn’t mean there are no opportunities- firms considering a market entry just need to do their homework.

What examples are there of British and Chinese FinTech companies collaborating with each other, and how can they collaborate with each other in the future?

In the 9th UK-China Economic and Financial Dialogue in Beijing, which the City of London attended alongside the UK Chancellor, both sides welcome the establishment of WorldFirst’s office and WFOE in Shanghai. In addition, the People’s Bank of China welcomed the move by WorldFirst to apply for a payments licence and to conduct cross-border payments.

A good example of UK-China collaboration for the future is the partnership agreement the London-based investment firm Future Planet Capital (FPC) and China’s Tsinghua University.

FPC will invest up to £30m in businesses spinning out Tsinghua University’s X-lab, a platform which supports and facilitates startups founded by Tsinghua alumni, students or faculties.

A truly innovative partnership is the announcement by R5FX to partner with Shanghai Clearing House to offer FinTech solutions to cross border RMB clearing.

I should add I am delighted 13 UK FinTech firms have been introduced to the China–Britain Business Council, and hope more approach CBBC to learn about expanding into China.

Are there any Chinese FinTech companies working and investing in the UK and what opportunities are there for Chinese FinTech companies in the UK?

Several firms from Hong Kong have already made inroads into the market. In September last year, Hong Kong Cyberport and the Hong Kong Monetary Authority brought the largest ever Hong Kong FinTech delegation to London to expand partnership network for industry players between the two cities. During an event held at the City of London’s Guildhall venue, a number of partnership deals were struck, including the wallet company TNG entering the UK market.

In terms of firms from the Chinese market entering the UK, we are already seeing the growth of Alipay and Wechat payment in our shops and stores. After all, there are a vast number of Chinese tourists and students coming to the UK each year, accounting for over £3 billion in spend annually. It makes sense to allow these people to use mobile payments abroad.

We’re also seeing Chinese FinTechs firming up their plans to enter the UK market.  X-Transfer is planning to launch in early 2018, and Ant Financial has successfully obtained a payment license from the FCA. In addition, BBD, a Chinese FinTech company, has been promoting cross border working.

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Hands up who has heard of the term blockchain? Not many of you? Well it is about time that you did. Some argue that blockchain is a form of technology that is going to revolutionise the internet and be a core component of how transactions take place in the future.

It is a decentralised “distributed database” that acts as a digital ledger. It records transactions – which could be the movement of goods, money or data – in a robust and secure way.

Because it is decentralised it is not controlled by a single party, company, bank or government, but it is monitored by a consensus of users. Furthermore, the security of blockchain means that once a transaction has been made it is virtually impossible to add, remove or change the data on it. This means it can’t be tampered with.

In short, blockchain could be a revolution in the way business, governments, organisations and individuals work together. It provides a simple, secure way to establish trust for any kind of transaction: the movement of money, sensitive information or products.

It’s worth understanding a little bit about the history of blockchain, which emerged as the key open-source technology behind bitcoin. Bitcoin is a crypto-currency or digital coin that was released in 2009 and used to make transactions as an alternative to traditional currencies held by nation states.

There are an infinite number of uses for blockchain – and the potential is only just starting to become clear

Blockchain was the public ledger that recorded all transactions of bitcoin autonomously, which meant that it didn’t need an administrator. It also solved the double-spending problem, by which a digital token can be copied or falsified.

How blockchain works is a little complex (see “How blockchain works”), but what it means is that the autonomous ledgers establish trust and provides a paperless way to establish ownership of money, information and objects.

So what does it mean for us?

Governments, banks and major institutions are setting up labs and research centres around the world to work out how blockchain can bring more efficiency to their businesses and the internet.

Banks such as UBS have research labs working out how to reduce fraud, increase efficiencies and speed up transaction times.

There is an infinite number of uses for blockchain – and the potential is only just starting to become clear. Some examples include:

Crypto-currencies

These are decentralised currencies that are not held, owned or controlled by a nation state, bank or government. They are peer-to-peer currencies used for fast and secure transactions without incurring the costs of a middleman.

Computing power

Companies like Golem have launched with an aim to create a supercomputer that enables users to share the power of all the world’s computers. People can make money from renting out their idle computer power. Other companies such as Storj aim to use the blockchain to decentralise storage. So instead of all your data being stored in a cloud held on one server, it is held across multiple servers.

Smart contracts

This would mean contracts would be automated and payments would be made when certain criteria are met rather than based on a third-party agreement. This creates an audit trail of verifiable date. This could ensure safety and transparency for supply chain financing. It might also mean your car insurance payments automatically change based on your real time driving habits. Or perhaps your mortgage rate automatically reduces if you change jobs. For companies such as Uber, Spotify, Airbnb and others that have to deal with receiving and sending funds, smart contracts would save time and money and reduce risk. For example, for a company like Spotify, a smart contract could make payments to an artist in real time as the listener plays their music.

Digital IDs

Passports, wedding licenses and birth and death certificates as well as medical records could be kept on digital IDs ensuring that no fake identity or identity cloning would be possible. Digital security would mean the billions lost in identity fraud would stop.

Digital voting

The biggest barrier to online voting is security. Using blockchain voters would be both secure and anonymous and ensure that there was no voter fraud.

Purchasing of services and goods

For products that need their authenticity verified, such as concert tickets, blockchain would ensure that the tickets cannot be sold multiple times and can verify the authenticity of the product.

Aid

Last month the UN World Food Programme (WFP) used the Ethereum blockchain to deliver food to Syrian refugees in Jordan. The operation allowed refugees to collect food, paid for by the WFP, from participating markets in the refugee camp in Jordan by having their eyes scanned to confirm they were on the register of more than half a million refugees cleared to receive aid.

From the multiple potential uses of blockchain so far it has been crypto-currencies that have got the most traction.  Last month the International Monetary Fund (IMF) said that banks should consider investing in crypto-currencies more seriously than they have in the past. Prominent economists such as Dong He, Ross Leckow and Vikram Haksar, said in the IMF paper that “rapid advances in digital technology are transforming the financial services landscape.”  These advances provide opportunities for consumers, regulators and service providers, it said. And crypto-currencies would provide solutions for consumers related to trust, security, financial services and privacy.

China leading the way

China is very much on the forefront of research into crypto-currencies and blockchain technology.  A new blockchain research lab has just been launched in Beijing’s Zhongguancun Science and Technology Park, to launch collaborative trials of the tech. A number of blockchain research centres in Nanjing, Shenzhen and Hangzhou are also home to a number of successful start-ups.

Another decentralised blockchain platform is Ethereum and it is especially popular in China as it allows other apps to build on top of it.

Peking University has created an Ethereum Labaratory to work on applications for improving supply chain management and energy markets.

Chinese companies such as Baidu, Ctrip, JD.com and Meituan are utilising Ethereum technology for aggregated payments services. And Alibaba’s $60 billion financial arm, Alipay, is experimenting with Ethereum technology to improve their global payment platforms.

The Chinese government are also getting in on the action. The People’s Bank of China (PBOC) is reported to have developed a prototype of a crypto-currency on the Ethereum blockchain that could end up in circulation in the near future. This would make them the first country in the world to test a national crypto-currency.

Why would China look at launching a crypto-currency? When it comes to digital payments, China already leads the world. It wasn’t long ago when we had to pay out Chinese landlords in stacks of cash. We had to queue in banks to pay utility bills and waste hours trying to transfer funds to friends and colleagues. Now that can all be done on our smart phones. Alipay and WeChat pay (who collectively process more than a $1 trillion of transactions a year) have changed the way people transfer funds in China and are increasingly making China a cashless society.

Although China is concerned about their hard currency (the renminbi) leaving China, the establishment of a crypto-currency could solve that problem. Allowing people to spend with their international crypto-currency may well take the pressure off the renminbi. Furthermore, a crypto-currency might help rural people in China who might have access to a smart phone but not a conventional bank. And also the tight security found on blockchain means it has the potential to reduce fraud and counterfeiting and weed out corruption.

Challenges and the future

Blockchain is a very new technology and few companies have implemented it on a major scale. It is still slow, there is no standardised implementation and there are still fears of hackers. Lawmakers need to solve questions on legal issues and liability, but the level of transparency of blockchain means that it is great for regulators who can spot fraud and deception. For governments and business alike blockchain could well be a way to democratise the internet and have true, free records for all. For individuals, it is certainly something to be aware of.

What is blockchain and how does it work?

Blockchain technology was first developed as part of the bitcoin digital currency but they are not the same.

Blockchain can support a wide range of applications including peer-to-peer payment services, supply chain tracking and more.

Blockchain is a digital ledger. It is a record of transactions. This can be tracking the movement of money, data, or goods, from a purchase at a supermarket or a government ID number.

Security

Block chain is secure – it is virtually impossible to add, remove or change the data without being detected by others.

Decentralised

Most transactions or ledgers are held by a company or government such as a credit card clearing house. Blockchain is decentralised so not held by a single party and verification comes from the consensus of users.

How blockchain works

The blockchain needs to gather data into blocks and then chain them together using cryptography.

If a transaction takes place, the transaction record is shared with other computers in the blockchain network.

The record is combined with other transactions into a block like a traditional computer database. The transaction is time stamped. When all transactions are complete, it is time stamped and sequenced to avoid duplicate entries.

The complete block is sent out across the network to join a chain.

Other participants might be sending out other blocks but the time stamps ensure the data is in the right order and the participants have the latest version.

Securing the chain

A bit of cryptographic math makes the links between the blocks unbreakable. A hash function takes the information in each block and uses it to make a hash – a unique string of characters.

The hash from one block is added to the data in the next block so when the next block goes through the hash function it is woven into the new hash, and so on through the chain.

So if there is an attempt to alter a previously created block in the next block it won’t match up any more and the mismatch will run through the subsequent blocks denoting an alteration in the chain.

For further explanation of blockchain visit the Goldman Sachs site here: http://www.goldmansachs.com/our-thinking/pages/blockchain/

What is Bitcoin?

Bitcoin was launched in 2009 on blockchain as a digital currency. Initially it received publicity as the currency used to make anonymous payments and transactions, and therefore was favoured by criminals. However, bitcoin is now accepted by hundreds of thousands of retailers and online stores around the world, and Japan recently become the first nation to pass a law to make bitcoin a legal currency.

Invented by the person or group known as Satoshi Nakamoto, bitcoin is decentralised, meaning it is not under the control of a person or state, and it was launched with a monetary policy based on scarcity. New bitcoins are being created as more blocks are added to the blockchain, and for every 210,000 new blocks created the number of bitcoin rewards halves. However, when the total number of bitcoins reaches 21 million – which is expected to be by 2140, then the scarcity will further increase their value.

When bitcoin was launched, a single coin was worth just a fraction of a dollar but the value has continued to rise, especially in the last 12 months, as more mainstream investors and retailers are using the currency. In March this year the value of bitcoin overtook the value of gold and has risen from $1,000 in January to $3,000 in June.

Bitcoin mining

Bitcoins work on blockchain. As every new transaction is entered into a system, every computer in the chain has to verify that transaction. Therefore no single person controls the system and it is impossible to hack. The process of verifying a transaction is called mining and as a reward, the miner receives the right to create a very small bit of that currency. As there are a finite number of bitcoins (21 million) the value of each bitcoin increases. There are a number of bitcoin mines set up purely to verify transactions and reap the rewards. This process is energy intensive, hence the rewards.

Sichuan, where there is an abundance of cheap hydro-electricity, has become a bitcoin mining centre. The soaring price of bitcoin meant that miners were making major profits. However, a lack of regulation has meant that many of these mines have closed.

The history of the web

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