beyond the frontier - deloitte · 2020. 8. 7. · john edwards her majesty's trade...

March 2021

Beyond the FrontierGuidebook for UK FinTechs to Enter China

Commissioned by:

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Foreword

Louise Brett FinTech and Financial Services Innovation Leader, Deloitte UK & Europe

John EdwardsHer Majesty's Trade Commissioner for China

UK FinTechs are renowned for their innovation, agility and ambition and are increasingly a key asset for Global Britain. Meanwhile, China offers a thriving financial market, huge demand from tech-savvy consumers and a political willingness to open up to foreign players. In addition, recent regulatory changes in China have unlocked new pathways for UK FinTechsready to go ‘Beyond the Frontier’.

Enabling FinTechs to achieve global scale and reach by accessing leading international markets is critical and right now it feels like any determined UK FinTech should be considering expansion into China. However, while the potential rewards are high, the challenges for businesses looking to embark on this complex journey are significant.

We were delighted to be asked by the UK Department of International Trade to bring our expertise in global FinTech expansion and Chinese policy and practice to this UK Guidebook. It’s jam-packed with useful information and sets out clear options for how UK FinTechs could approach business growth in China. I hope it will smooth your way and that the perspectives from C-suite execs and successful case studies will inspire anyone feeling daunted by China’s intricate regulatory environment.

Embarking on this adventure will require detailed research and an in depth understanding of the local context. While I can’t promise it will be easy, if your strategy and execution are right, it will be worth it.

FinTech is fundamentally transforming the way financial services firms operate and changing the way we transfer, borrow, protect and manage our money. I am very happy to say that as the leading global FinTechcentre the UK, and UK firms have been at the forefront of much of this change.

The UK represents 10% of the global FinTech market with revenues of £11bn. Whilst the UK market is highly developed, it is important for UK FinTech’s to continue to expand and to take advantage of opportunities globally. The scale and size of the market in China provides just such an opportunity for UK FinTechs.

China’s FinTech market has been evolving at an incredible pace and is now home to some of the world’s largest FinTech companies. China is also home to one of the highest FinTech adoption rates in the world and a rapidly developing financial services sector, thus making the Chinese market a prime market for UK FinTechs to explore.

Whilst the opportunity in China is large, seizing upon this is not such an easy task. It is however something that the Department for International Trade China team are here to support UK FinTechs with every step of the way. The commissioning of the development of this guidebook to market entry by DIT China is just the first step in helping UK companies to both better understand the Chinese market and start to map out potential market entry strategies.

I would encourage any UK FinTech that has an interest in exploring opportunities in the Chinese market to get in touch with our FinTech team here and to join subsequent roundtables to better understand the market and opportunity set here.

I welcome the publication of this guidebook and its recommendations as we continue to support UK FinTechs in China.

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More from us

• Doing Business in China 2020 (2020)

• FinTech Strategy for the Great Bay Area in China (2020)

• Banks on the move | Establishing FinTech enabled Private Banks and Wealth Managers in China (2020)

• Sino-Foreign Joint Ventures after COVID-19 | What to expect? (2020)

• The multiplier effect | The imperative for coordinated technology deployment in financial services(2020)

• Get ready for Wealth Management Connect in the Greater Bay Area (2020)

• Opportunities and Challenges to foreign institutions as Chinese financial industry opens further (2018)

• A catalyst for change | How FinTechhas sparked a revolution in insurance(2018)

FinTech innovation knows no borders and the coronavirus pandemic has accelerated digital adoption to create a global opportunity for FinTech harmonisation.

The UK FinTech sector is experiencing a ‘Big Bang’ moment. Bursting with activity both in London and regionally, the UK holds more than 10 per cent of the global FinTech market share. At this pivotal moment the sector requires focused actions to ensure entrepreneurs can establish and scale their businesses in their home markets and successfully export their products and services internationally.

This guidebook, commissioned by the UK Department of International Trade in collaboration with Deloitte LLP, provides an introduction for UK FinTechs considering expansion into China. Beginning with an overview of the Chinese market, it provides useful advice for effective market entry strategies and clear information about regulation, tax and employee relations in China.

Designed for FinTechs in the UK, this guide identifies critical aspects to consider as they plan to enter and grow their business in China.

About this guidebook

Readers’ note

The UK’s Department for International Trade is an international economic department, which aims to secure UK and global prosperity by promoting and financing international trade and investment, and championing free trade.

Deloitte engages with leading FinTechs in the UK and globally to address growth and expansion opportunities across international markets. Our Global Chinese Services Group ensures UK perspectives are put into a China context.

https://www2.deloitte.com/content/dam/Deloitte/at/Documents/Tax/Chinese%20Services%20Group/at-doing-business-china-2020.pdf

https://www2.deloitte.com/cn/en/pages/financial-services/articles/fintech-pbwm-china.html

https://www2.deloitte.com/cn/en/pages/finance/articles/sino-foreign-joint-ventures-after-covid-19-report.html

https://www2.deloitte.com/content/dam/Deloitte/lu/Documents/financial-services/lu-wef-summary.pdf

https://www2.deloitte.com/content/dam/Deloitte/cn/Documents/financial-services/deloitte-cn-fsi-greater-bay-area-wealth-management-connect-publication-en-201130.pdf

https://www2.deloitte.com/content/dam/Deloitte/cn/Documents/risk/deloitte-cn-ra-china-financial-industry-opening-en-180924.pdf

https://www2.deloitte.com/content/dam/Deloitte/cz/Documents/financial-services/cz-fintech-revolution-in-insurance-2018.pdf

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Research:

Interviews with FinTechs to understand their most pressing questions and concerns for entering a new market, and specifically the Chinese market.

Guidebook outline:

Responses from the FinTechswere collated to establish a core set of topics.

Deep dive interviews:

Interviews undertaken with the relevant SMEs to deep dive into each of the areas identified in the initial Guidebook interviews.

Guidebook consolidation:

Following the interviews, we consolidated all the information into this comprehensive Guidebook.

Guidebook launch:

To launch this Guidebook we presented our findings at a global webinar of invited guests.

We interviewed more than 40 FinTech professionals, M&A dealmakers, Risk, Tax and Legal experts based in China, as well

as senior C-suite executives from leading FinTechs in the UK

Document review:

Calls with key Deloitte SMEs to gather information and review the initial Guidebook outline.

Acknowledgements

The project team would like to acknowledge the

following subject matter experts for their advice and

suggestions.

Methodology

Andrew McNeillAtul MathurBen PowellChris BrownDan OakeyDavid PercivalDavid WUDimitri TsopanakosEdward MathesonElaine WUFung Yu CHEUNG

Harry ZHANGHelen EvansHinnerk Fahrenkamp James AlexanderJing NIJonathan GrayMiles KennedyNatalie YUNeil CampbellNorman SzePaul Coulthard

Paul FreemanPaul SuttersPetronella LofflerPhillip OlivierRichard EighteenRussell DavisSteve XINGVeronica CHENGXi LUZhongbin YOU

Deloitte

Department for International Trade

names in alphabetical order

Daniel Cowen (FCDO)John Edwards Lingxia HUANG Ning XIAO (FCDO)Philippa Martinelli Rhys Gordon-Jones

Stephen Baron Ting SU (FCDO)Wei WANGYinfan ZHANGYining SHEN

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Abbreviations used throughout this guidebook and a list of Public, Regulatory and Industry bodies referenced

Key terms and abbreviations

AI Artificial Intelligence AML Anti-Money LaunderingAPAC Asia-Pacific (Region)API Application Programming InterfaceBEPS Base Erosion and Profit Shifting

DLT Distributed Ledger TechnologyEIT Enterprise Income TaxESG Environmental, Social, and GovernanceGBA Greater Bay AreaHNTE High and New Technology Enterprise IIT Individual Income TaxIOT Internet of ThingsIP Intellectual Property JV Joint Venture KYC Know Your Customer M&A Mergers and AcquisitionsP2P Peer-to-Peer (lending)PFTZs Pilot Free Trade ZonesPaaS Platform-as-a-Service R&D Research and Development

RPA Robotic Process Automation SD Stamp DutyTRIPS Trade-Related Aspects of Intellectual Property RightsVAT Value-added TaxWFOE Wholly Foreign Owned Enterprise

Abbreviations Public, Regulatory, and Industry Bodies

AMR Administration for Market Regulation

CAC Cyberspace Administration of China

CBDC Central Bank Digital Currency

CBIRC China Banking Insurance Regulatory Commission

CNIPA China National Intellectual Property Administration

CSRC China Securities Regulatory Commission

DIT Department for International Trade

FCA Financial Conduct Authority

FCDO Foreign, Commonwealth & Development Office

FSB Financial Supervision Bureau

NCA National Copyright Administration

NIFA National Internet Finance Association

MPS Ministry of Public Security

OECD The organisation for Economic Co-operation and Development

PBOC The People’s Bank of China

SAFE State Administration of Foreign Exchange

SAT State Taxation Administration

WTO World Trade Organisation

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Executive summary

The UK FinTech sector is highly successful and significant, it employs c.76,0001

people and adds more than £11bn2 to the UK economy. It is recognised globally as a thriving FinTech hub, leading the way with a robust a ecosystem, progressive regulations and policymaking and a pool of creative, technical talent.

As the world’s largest consumer market and with a financial services sector which is transforming, China offers attractive opportunities for UK FinTechadvancement. At the same time, China’s own exponential FinTech growth opens up an array of opportunities for businesses globally.

While China establishes itself as a leader in financial services innovation and its FinTech sector experiences a phenomenal expansion, more focus is being placed on regulation. In recent years, policies and guidance have been developed to support domestic and foreign FinTechs navigating their responsibilities while operating in China.

With such a fast-changing landscape, it is imperative for UK FinTechs to understand and carefully plan their specific requirements before embarking on an expansion journey.

This guide assesses the FinTech market landscape in China and evaluates strategies for UK-based FinTechs considering a play in China. It distils and synthesises FinTech market trends, explores considerations for expansion, and examines the regulatory and tax implications.

While it does not eliminate the need to seek specialist legal, regulatory or tax advice, this guide offers a valuable introduction for UK-based FinTechsconsidering opportunities in China.

This guide covers:

• Chinese FinTech market overview

• Common market entry strategies

• Regulatory considerations

• Tax implications for foreign market players in China

• Employee relations, including the responsibilities of an employer in China

1 Response, and recovery: FinTech during the Covid crisis and beyond - speech by Tom Mutton, Bank of England2 Kalifa Review of UK FinTech, February 2021

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Voice from the UK FinTechs

CEO, Personal Finance FinTech

“Expanding the business to China isn’t easy, our initial focus must be on understanding the local culture and attitudes towards data sharing. We need to appreciate whether the culture is conductive to our services, and that the end user will be happy with sharing their data in a way that makes our services useful for local businesses.”

Head of Global Partnerships, European WealthTech“From a commercial perspective, the first thing we consider is client needs, and how we fit into those client needs. Next we would want to fully understand the competitive landscape in China.”

Head of Asia Strategy, Global PaaS Organisation

“There has been a tendency to wheel out a broad suite of instructions to FinTech companies in China, but in many cases domestic businesses tend to win, which is why it’s so important to truly understand the pain points and differentiate in the market. For us, we think the opportunity is in the Greater Bay Area.”

Head of Asia-Pacific Growth, Flagship UK FinTech“Regulation, Regulation, Regulation. We are watching the China marketand we see lots of policy guidance from regulators, but that’s guidance, what do they really think? We would like to explore roundtables with them, and understand their supervisory narrative, for example, on data transfer.”

Director of International, Pensions Investment FinTech“For us, understanding regulations relating to data transfer and transfer pricing (tax) are absolutely critical. The former impacts our business model, the latter impacts our business valuation.”

Head of Expansion, Leading Digital Currency Operator “Cryptocurrency is early for a lot of people, and there are a lot of unknowns in terms of operating with it in different markets. For us, it’s important to understand how the regulations work, and where we can support local players to leverage our technology.”

This guide draws on interviews with UK national and international FinTechs, and incorporates SME input from the legal, tax and regulatory domains, to present a view of the current and future opportunities for UK FinTechs entering the Chinese FinTech market

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Assisting your journey into China

Whatever your stage of business growth, the Department for International Trade and Deloitte can provide advice and support at every step as you expand and grow in China

Initial market research

Shape your entry strategy

including regulatory

considerations

Identify potential partners

Provide business setup

advice -including Tax

and Legal

Scale your operations

• Take a market sounding• Undertake initial policy

research• Source invitations to

industry and government roundtables

• Identify potential investors in the ecosystem

• Identify, validate and connect with government and industry

• Provide strategic consultancy

• Explore innovative growth domains

• Advise on regulations e.g. data privacy, cyber security, IP protection.

• Enable government, regulator and industry networking

• Facilitate product roadshows

• Advise on M&A deals and execution

• Provide business partnership legal advice

• Support with business setup

• Help with license applications

• Establish onshore/offshore managed services

• Provide expert advice on tax and employee relations issues

• Strategic consulting to investigate growth areas

• Guidance regarding government, regulator and industry relationships

• Explore matchmaking opportunities with potential investors

• Support with deal structure design and valuation

• Tax and Legal advice

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Contents

1. China’s FinTech market - an overview 10

2. Market entry strategies 21

3. Regulatory considerations 37

4. Understanding the tax regime 54

5. Employee relations 58

• Setting the FinTech scene in China

• Defining FinTech in the UK & China

• FinTech technologies & regional hubs

• Policy reform and success stories

• Options for entering the China market

• China market entry 101: WealthTech as an example

• Perspectives from UK FinTech executives

• Overview of the FinTech regulatory regime

• Supervisory innovation in China

• Cyber security in China

• IP protection in China

• Licensing requirements

• Tax considerations for market entry strategies

• Tax incentives in China

• Transfer pricing considerations

• Setting up a Foreign Invested Enterprise

• Labour laws in China

11

14

16

19

22

27

32

38

40

43

46

50

55

56

57

59

60

1010

China’s FinTech market - an overview

Regulatory considerations

Market entry strategies Employee relationsUnderstanding the tax

regime in China

Chapter 1. China’s FinTech market - an overviewChina’s FinTech landscape is booming. In this chapter we consider how and why China has been so successful and what opportunities China offers UK FinTech companies looking to expand.

We consider the nuanced definitions of FinTech and introduce different FinTech verticals, key market players, and China’s regional FinTech hubs. Finally, we look at the challenges UK FinTechs face in the light of changing Chinese policy and regulations.


1111




regime in China

China has become the largest FinTech player in the world. Now with the introduction of new government initiatives, the FinTech landscape in China presents significant expansion opportunities for the UK

Setting the FinTech scene in China


FinTech expansion, financial innovation and government intervention

Since China began introducing economic reforms in the late 1970s, its GDP has grown exponentially. Despite a rocky start in 2020, reports suggest that China’s GDP grew 2.3% -even with the impact of COVID-19 - making it the only major economy in the world to do so1.

As China’s economy has matured, so has the need for adopting alternative sources for economic growth2. The introduction of internet finance, along with the government’s continued focus on financial innovation, has enabled China to become the largest FinTechplayer in the world - in spite of its traditionally stringent financial regulations.

With an estimated 87% of Chinese consumers using FinTech services3, China’s FinTechlandscape is booming. During the second half of 2019, the China FinTech market attracted £18 billion in investment4 and the Chinese FinTech market continues to spur interest as it opens-up. By 2020, China held 24% of the market share of unicorns globally, making it the second largest market share holder for technology unicorns in the world5.

Part of this success has been the result of large technology firms such as Ant Group and TenCent diversifying to offer mobile payment solutions for the approximately 1.6 billion mobile phone users in China.

As the FinTech landscape evolves, the Chinese government is updating and amending its regulations for both technology and financial services operators with the aim of improving the innovation landscape and opening-up to more players. China’s Central Bank FinTech Plan (2019-2021) outlines the country’s proposal to boost the growth of the FinTech sector, with an emphasis on improving the FinTech infrastructure. These reforms bode well for financial innovation players in the UK looking to expand their operations.

Future of FinTech

As the FinTech market in China continues to mature, so does the need for diverse market players and global integration.

While activity in the China FinTech market continues to be dominated by mobile payments, other sectors - including wealth management, insurance, blockchain technologies - are gaining traction.

Increasingly, we are seeing Chinese FinTech market players stepping outside domestic borders and expanding their businesses internationally. For example, in 2020, Ant Group applied for a digital banking license in Singapore and Tencent has increased its market presence by investing in European start-ups6.

We are also seeing more international FinTechs making their move into China. For example, in January 2021, PayPal finalised the flagship acquisition of a majority share in GoPay, a local payments company. In the same month, HSBC FinTech Services (Shanghai) Company Limited became the first FinTech subsidiary opened by a foreign financial institution. Several other UK FinTechs, such as R5, OakNorth, Redington, have also set foot in the China market.

These activities mark the first of many international moves. Clearly the FinTech landscape in China presents significant expansion opportunities for FinTechs in the UK and globally.

1 WRAPUP- China’s Q4 GDP growth beats forecast, ends 2020 in solid position after COVID-19 shock, Reuters, January 2021.2 China’s Economic Rise: History, Trends, Challenges and Implications for the United States, June 2019 3 China FinTech Report, South China Morning Post4 EY analysis as of December 2019, Deloitte research5 $1B+ Market Map: The Worlds 500+ unicorn Companies in One Infographic, CB Insights, 20206 TenCent is betting heavy on European FinTech companies, China Daily February 2020

Notes: The term unicorn refers to a start-up company valued at over $1bn, i.e. £730m with the British Pound to USD exchange rate as of 31st January 2021

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regime in China

Macro-economic factors Consumer participation

Scale of the FinTech sector Financial service landscape

CHINA UK

Population1 1.4B 67M

GDP2 £10.28T £2.01T

Exports1 £1.9T £643B

GDP per capita1 £7,377 £30,430

Corporate Tax Rate2 25% 19%

Source: :1. World Bank 2019-202. Trading Economics, 2019

CHINA UK

FinTech Investment per annum5 £18.1B £3.6B

No. of unicorns6 122 25

FinTech revenue per annum6 £38B £11B

Investment growth5 300% 150%

CHINA UK

Mobile penetration3 64% 85%

Mobile banking penetration3 57% 76%

Unbanked1 20% 4%

FinTech adoption4 87% 71%

CHINA UK

FS as % of service import7 3% 10%

No of world’s top 50 banks8 12 5

FS as a % of GDP9 9% 6.9%

No. of FS employees3 7.5M 1.1M

Source: :5. EY analysis as of 2019, Deloitte research6. Kalifa Review of UK FinTech 2021, Deloitte research

Source: :3. Statista, 20204. EY Global FinTech Adoption Index

Source: :7. World Bank, 2020

8. S&P Global Market Intelligence, 20209. House Of Common Library, 2020

Notes: British Pound to RMB Exchange rate as of 31st January 2021

Notes: British Pound to RMB Exchange rate as of 31st January 2021

The UK brings a wealth of experience in international collaboration and UK FinTechs are attracted by the scale of the economic volume in China and the preferential terms for FinTech adoption

UK and China - the economic backdrop


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regime in China

• Global FinTech revenue is expected to grow annually by around 12% by 2024. The Asia Pacific (APAC) and Americas regions are currently the largest revenue contributors, with the APAC region expected to take half of the global FinTechrevenue by 2024. The European FinTech market is considerably smaller.

• The UK and China are the dominant FinTech markets within EMEA and APAC respectively. With large and transformative policy initiatives underway, China is at a critical juncture to shape the future of financial services innovation with world-leading digital public infrastructure. China is expected to account for 82% of APAC FinTech revenue by 2024.

• These projections suggest significant market potential in China for UK FinTechs ready to participate, develop and co-evolve.

2833

3947

5665

7484

1717

1820

21

23

24

26

2530

37

43

48

51

53

55

2017

Global FinTech revenue (£ bn) to grow by 11.7% per annum (2019-2024)

Americas

EMEA

APAC

24212018 19 22 23

72%

82%

34%

53%

2017 18 19 20 21 22 23 24

China/APAC UK/EMEA

82% of APAC FinTech revenue comes from China by 2024

11.7%

Asia Pacific accounts for the highest proportion of global FinTech revenue and is projected to be the fastest growing region in the world – China is expected to contribute over 80% of the Asia Pacific regional revenue

FinTech revenue in a global context

Source: Mordor Intelligence, Deloitte Research

Notes: actual figures up until 2020. These numbers are originally denominated in USD, and were converted to GBP at the 31st Jan 2021 GBP/USD FX rate of 1.37 1 Compound annual growth rate

1


In comparison, 53% of EMEA revenue is expected to come from the UK by 2024

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regime in China

Understanding how China defines the scope of FinTech is important. It is influenced by China’s leapfrog into FinTechagainst a backdrop of a historically immature financial services system and widespread internet and smartphone use

Defining FinTech in the UK and China

Internet Consumer Finance

Providing loans to resident individuals

under the principle of small sum and

dispersion online (B2C)

Online Payments

Payments made B2B, C2C, or B2C

online

Internet Consumer Lending

Lending made between individuals

online (P2P) 1

Internet Insurance

Online insurance policy selling,

brokerage and advisory services

Internet Banking

Deposit business, selling financial

products, advisory services online

Internet Securities

Online based security selling,

brokerage, including agencies

providing information technology

services for fund management

Personal FinanceTools to manage bills

and track personal and/or credit

accounts

Payments & BillingPayment processing, card developer and subscription billing

software tools

LendingMarketplace lending,

micro-lending and alternative

underwriting platforms

InsurTechCompanies selling insurance digitally

providing data analysis and software

for (re)insurers

Money Transfer and Remittances

International money transfer and tracking

software

BlockchainCompanies leveraging

blockchain technologies for financial services,

crypto-exchanges and crypto-currencies

Capital marketsSales & Trading,

analysis, and infrastructure tools

for financial institutions

Wealth managementInvestment and

wealth management platforms and analytics tools

Mortgage & Real estate

Mortgage lending, digitisation, and

financing platforms

RegTechAudit, risk, and

regulatory compliance software

Source: CB Iinsights FinTech categorisation, 2020 China Internet Finance Industry Report, NIFA, Deloitte Research

• The UK has provided an attractive ecosystem for the varied stages of FinTech development. As of December 2020, there are over 2,500 FinTechs in the UK. These provide services spanning ten primary areas - as defined by CB Insights. Of these, ‘Payments, Billing and Wealth management services’ is home to the largest number of UK FinTechs.

• Unlike the UK, the growth of the FinTech market in China has echoed the increased use of internet and smartphone penetration. With that underlying narrative, and in light of the PBOC FinTechDevelopment Plan (2019-2021), the official definition of FinTech from NIFA, a self regulatory body officially established by PBOC, sees the FinTechs differently. FinTech categorisation in China is broadly based on the way activities are supervised by the competent authorities.


1 Operating P2P online lending platforms had fallen to zero by

November 2020 in China, although collections activities are

continuing. For the purpose of categorisation we have kept it here

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regime in China

In the context of fast-changing demographics, traditional financial institutions, licensed FinTechs, internet giants and niche technology companies are competing with each other through high-tech adoption

Key FinTech players in China


Online Payments

Internet giants: Financial institutions: • AI• Biometrics• Blockchain

• By June 2020, China’s third-party payment market size reached RMB 59.8 trillion. AliPayand WeChat Pay account for 55% and 39% of the market shares respectively


Commercial banks: Professional consumer finance FinTechs:

Internet giants: • AI• Big data• Biometrics

• Total market size estimated to be RMB 12 trillion by the end of 2020

Internet Consumer Lending

Professional internet consumer lending FinTechs:• AI• Big data

• Operating P2P online lending platforms had fallen to zero by November 2020

• Qualified platforms are encouraged to change to consumer finance companies

Internet Banking

Traditional banks: Online banks: • AI• Blockchain• Internet of Things• Cloud computing

• By the end of 2019, around 120 banks have carried out direct sale business models

Internet Securities

Securities FinTechs: Internet FinTechs: Internet information platform FinTechs: • AI• Big data• Cloud computing

• Annual value of trades executed online has reached RMB 14.42 trillion in 2019

Internet Insurance

Traditional Insurance FinTechs: Internet insurance FinTechs: Online FinTechs: • AI• Big data• Cloud computing• Block chain

• The total annual revenue of internet insurance reached RMB 269.6 billion in 2019

Selected key players1 Other observationsTechnology

applications2

Source: NIFA, China FinTech Industry Report 2020, Public information, Deloitte Research1 2 Not a comprehensive list

(WeSure)(Zhongan Insurance)

(Futu Securities)(Tiger Securities) (Tonghuashun)

(VIP Shop) (Xiaomi Financial)

(JD Digital Technology)

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regime in China

Seven interrelated technologies have underpinned the expansion of the China FinTech sector – known as the A-to-G enablers

FinTech technologies in China

Source: Global FinTech Hub Report 2020, public information, Deloitte Research

A. Artificial IntelligenceAI and RPA technologies are used for account opening, anti-money laundering (AML) checking and user acceptance testing.

D. Big DataAn extensive database that includes all the customer-related information necessary for detailed and personalised analysis.

E. EcosystemEcosystems provide industry with capital, talents, policy and government initiatives to support the development of FinTech.

G. 5GThe construction and deployment of 5G provides the infrastructure for further innovation in the field of FinTech.

B. BlockchainAllows multiple parties to have simultaneous access to a constantly-updated digital ledger that cannot be altered.

C. Cloud ComputingCloud computing offers the possibility of a more cost-effective infrastructure design model and allows access to the same kinds of applications through the internet, leading to high efficiency, low cost and data security.

F. Facial RecognitionFacial recognition and other biometrics technologies can greatly improve the safety performance of online payments.


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regime in China

FinTech hubs in China The Chinese government has encouraged FinTech growth by creating regional-level FinTech hubs

Beijing

• Advanced FinTech infrastructure• Complete ecosystem, with:

– Many high valuation FinTech companies: Lakala, 9f Inc., Qudian, JD Digital, Duxiaoman Financial and BitMain

– The most top universities in China, including Peking University and Tsinghua University

– All the financial regulatory authorities• Innovative FinTech regulatory and supervisory regimes

Shanghai

• Finance driven FinTech hub• FinTech ecosystem:

– International financial centre– Solid economic foundation– Supportive policies

• Representative FinTech companies: Zhongan Insurance, Lufax

Shenzhen (Greater Bay Area1)

• Technology driven FinTech hub• FinTech ecosystem

– Regional financial centre– Home of leading technology companies: Huawei, Tencent– Younger population and higher FinTech penetration– Special economic zone: innovative regulatory structures

and policies• Representative FinTech companies: Lexin, WeBank,

Merchants Union Consumer Finance

Hangzhou

• Technology driven FinTech hub• Advanced digital economy development• FinTech ecosystem:

– Concentration of FinTech giants: Ant Financial, Lianlian Pay, Hyperchain, Hundsun, Hithink RoyalFlush

– High FinTech penetration rate as Hangzhou is widely regarded as the ‘City of Mobile Payment’

– Open government and supportive policies

Guangzhou (Great Bay Area1)

• Government driven development• Digitalised inclusive finance solutions• “One-stop” FinTech Service and cooperation between

Guanzhou government and Tencent to build a FinTechBig Data Supervision platform

• Representative FinTech companies: Helipay

Chengdu

• Advanced technology centre in south western China

• FinTech supportive policies• FinTech innovative projects including

Jiaozi FinTech centre

Chongqing

• Higher-education centre in south western China

• National FinTech Certification centre

• Jiangbeizui FinTech Port

Source: Global FinTech Hub Report 2020, public information, Deloitte Research1 Significant interest in the Great Bay Area raised by UK FinTechs during our interviews


Nanjing

• Consumer experience driven FinTech hubs;• Supportive government and high-quality universities;• Representative FinTech companies: Suning Finance,

FuRongBao

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regime in China

Zhaoqing

Foshan

JiangmenZhuhai

Macau

Guangzhou

Dongguan

Huizhou

Shenzhen

RMB 53,000

GDP: RMB 20B Pop: 4.1M

GDP: RMB 2,286B Pop: 14.5M

RMB 85,000






GDP: MOP 440B Pop: 0.67M

GDP: RMB 2,422B Pop: 12.5M


HK$381,000

GDP: HK$2,839B Pop: 7.5M

RMB 111,000

RMB 155,000

RMB 99,000

RMB 159,000

MOP 666,000

HK$ 381,000

RMB 190,000

RMB 63,000

RMB 128,000

ZhongshanHongKong

Demographics of the GBA area by GDP per capita

Source: Deloitte research, FinTech Strategy for the Great Bay area 2020

Hong Kong is the springboard for Chinese Financial

Services expansion. A number of UK FinTechs have already

established their subsidiaries here, where they benefit

from inflow and outflow business opportunities.

• With a population of 69 million, the GBA has already exceeded the populations of the UK, presenting a huge potential for growth and development.

• Each of the eleven cities in GBA are fueled by different economic activities. This economic diversity has generated a busy and energetic cluster, which could share profound synergies.

• The GBA Blueprint, released in February 2019, provides a framework for how the intra-regional cities can interact and in the coming years, the GBA is expected to see accelerated flows of people, goods and capital.

Logistics (Goods Flow)

Financial Inclusion (People Flow)

Trade Finance (Capital Flow)

Digital Identity (People Flow)

Use Cases• Qualification• Citizen Record• SME Financing

• Unbanked• Microfinancing• Cross-Border Payment

• Collateral• Trade Document Fraud• Counterfeit Product

• Custom & Tax Clearance• Insurance• Shipping Tracking

FinTechSolutions

• KYC DLT• Digital Identity, Open API• Credit DLT

• Digital Identity, Open API• Artificial Intelligence

• Collateral DLT• Trade Finance DLT• Traceability DLT & IoT

• Supply Chain DLT• Traceability DLT & IoT

FinTech hubs - the Greater Bay Area (GBA) as an exampleThis large, vibrant market hub is calling for international FinTech collaborations and has already raised great interest from UK FinTechs


GBA has unrivalled potential for FinTech development including DLT, big data, AI, Cloud, and open API technologies. UK FinTechs have a great opportunity to join forces, facilitating an international FinTech integration

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regime in China

2017/03 Guidance published on promoting the rapid and healthy innovation and development of financial science and technology in Futian District

2017/06 The 13th five-year development plan of information technology in China's financial industry

2018/10 Implementation opinions of Guangzhou on promoting the innovation and development of financial science and technology

2019/08 Financial technology development plan (2019-2021)

2020/01 Implementation plan for accelerating the construction of Shanghai Financial Technology Centre

2020/03 Interim provisions of Shanghai Stock Exchange on application and recommendation for listing of enterprises on Science and Technology Innovation Board

2020/04 Guiding opinions of the general office of Chongqing Municipal People's Government on promoting the application and development of financial science and technology

2020/05 Chengdu financial technology development plan (2020-2022)

2018/10 Beijing's plan for promoting financial technology development (2018-2022)

2018/11 Guidance published on the innovation and development of financial science and technology in the capital

2019/10 Guidance published on promoting the development of financial science and technology and supporting the construction of Shanghai Financial Scienceand Technology Centre

2017 2018 2019 2020

2018/03 PBOC liberalises market access restrictions for foreign payment institutions

2019/11 China Banking and Insurance Regulatory Commission (CBIRC) issued 11 measures for opening-up, known as the “11 measures”

2017.3《关于促进福田区金融科技快速健康创新发展的若干意见》关于促进福田区金融科技快速健康创新发展的若干意见--投资指南 (sz.gov.cn)2017.6《中国金融业信息技术十三五发展规划》中国人民银行关于印发《中国金融业信息技术“十三五”发展规划》的通知 (pbc.gov.cn)2018.10《北京市促进金融科技发展规划（2018年-2022年）》中关村国家自主创新示范区_中关村科技园区管理委员会_关于印发《北京市促进金融科技发展规划（2018年-2022年）》的通知(beijing.gov.cn)2018.10《广州市关于促进金融科技创新发展的实施意见》广州市金融工作局关于印发《广州市关于促进金融科技创新发展的实施意见》的通知 - 广州市人民政府门户网站 (gz.gov.cn)

2018.11《关于首都金融科技创新发展的指导意见》北京市金融工作局中关村科技园区管理委员会西城区人民政府海淀区人民政府关于印发《关于首都金融科技创新发展的指导意见》的通知_政策文件_首都之窗_北京市人民政府门户网站 (beijing.gov.cn)2019.8《金融科技发展规划2019-2021》中国人民银行关于印发《金融科技（FinTech)发展规划（2019-2021年）》的通知 (pbc.gov.cn)2019.10《关于促进金融科技发展支持上海建设金融科技中心的指导意见》促进金融科技发展支持上海建设金融科技中心 (pbc.gov.cn)2020.1《加快推进上海金融科技中心建设实施方案》上海市人民政府办公厅关于印发《加快推进上海金融科技中心建设实施方案》的通知 (shanghai.gov.cn)

2020.3《上海证券交易所科创板企业发行上市申报及推荐暂行规定》关于发布《上海证券交易所科创板企业发行上市申报及推荐暂行规定》的通知 | 上海证券交易所 (sse.com.cn)2020.4《重庆市人民政府办公厅关于推进金融科技应用与发展的指导意见》重庆市人民政府办公厅关于推进金融科技应用与发展的指导意见_重庆市人民政府网 (cq.gov.cn)2020.5《成都市金融科技发展规划(2020-2022年)》成都市人民政府中国人民银行成都分行关于印发成都市金融科技发展规划(2020-2022年)的通知-成府发 - 文件 - 法规公文 - 信息公开目录 - 成都市人民政府办公厅-成都市政府信息公开 (chengdu.gov.cn)

Source: Deloitte Research, sets of official government guidance

In a further step towards FinTech advancement, a number reforms and policy changes were made in China to facilitate foreign entry

China has opened-up through policy reform


Key reforms offer opportunities for foreign financial service entities to prepare, apply and, in recent cases, now obtain licenses to operate in China

http://www.sz.gov.cn/cn/zjsz/fwts_1_3/tzfw/tzzn/content/post_1318005.html

http://www.pbc.gov.cn/zhengwugongkai/4081330/4081344/4081395/4081686/4085644/index.html

http://zgcgw.beijing.gov.cn/zgc/zwgk/ghjh/179396/index.html

http://www.gz.gov.cn/ysgz/tzzc/hdxd/content/post_5660504.html

http://www.beijing.gov.cn/zhengce/zhengcefagui/201905/t20190522_61617.html

http://www.pbc.gov.cn/zhengwugongkai/4081330/4081344/4081395/4081686/4085169/index.html

http://shanghai.pbc.gov.cn/fzhshanghai/113571/3911796/index.html

http://www.shanghai.gov.cn/nw48507/20200825/0001-48507_63390.html

http://www.sse.com.cn/star/lawandrules/lawandrules/marketrules/c/c_20200327_5020656.shtml

http://www.cq.gov.cn/zwgk/zfxxgkml/szfwj/qtgw/202004/t20200407_8614337.html

http://gk.chengdu.gov.cn/govInfo/detail.action?id=117552&tn=6

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regime in China

Success stories

Key milestones since 2018

Phase 0

In March 2018, the PBOC liberalised market access restrictions for foreign payment institutions.

In March 2019, the CBIRC approved the Sino-British joint venture, Hengan Standard Life, to prepare for the establishment of the first foreign-invested pension insurance company.

In July 2019, the CBIRC issued 11 measures for opening up, including encouraging foreign financial institutions to participate in the establishment of, and invest in the shares of, wealth management subsidiaries of commercial banks, as well as allowing foreign financial institutions to form investment pension management companies.

In September 2019, PayPal's PRC subsidiary obtained the first online payment service license (see more details in Business models for market entry in Chapter 2).

From April 1 2020, restrictions on foreign shareholding ratios of fund management companies were removed nationwide. On the same day, BlackRock and Neuberger Berman became the first foreign entities to submit applications to set up mutual fund management companies in China.

From December 1 2020, restrictions on foreign shareholding ratios of securities companies was removed nationwide.

In January 2021, British banking major HSBC set up a FinTech subsidiary in Shanghai to scale up its business in mainland China.

HSBC FinTech Services (Shanghai) Company Limited is the first FinTech subsidiary opened by a foreign financial institution in China.

From January 1 2020, restrictions on foreign shareholding ratios of life insurance companies were removed nationwide.

In January 2020, Allianz established a subsidiary – the first wholly foreign-owned insurance company in China. On February 14 2020, Oaktree

Capital, the first foreign distressed debt manager to establish a wholly-owned unit in China, established its subsidiary in Beijing.

In March 2020, Morgan Stanley and Goldman Sachs received regulatory approval to buy majority stakes in their joint ventures in China.

In the last two years, new Chinese policies have enabled a number of significant foreign FinTech success stories


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Chapter 2. Market Entry StrategiesSuccessful entry into the China market starts with the right strategy and, in this chapter, we set out the three main choices to consider.

In a section called ‘China Market Entry 101’ we offer some overarching advice for UK FinTechs seriously considering a play in the region, followed by a ‘Perspectives’ section where we share feedback from UK FinTech executives currently exploring expansion into China.

Market entry strategies

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Options for entering the China market Successful entry into the China market starts with the right strategy – there are three main options

Setting up a Wholly Foreign- Owned

Enterprise(WFOE)

Mergers & Acquisitions

Technology Collaboration

The three most common strategies for a FinTech entering the China market

When entering or trying to expand its presence in China, a UK FinTech is faced with a number of options:

Option 1

By setting up a Foreign Invested Enterprise (FIE) of which the Wholly Foreign-Owned Enterprise (WOFE) is the most common.

Option 2

Through Mergers and Acquisitions (M&A), for example, buying a local asset outright or being acquired by an established Chinese enterprises.

Option 3

With a Technology Collaboration where a cooperative relationship is established with an existing market player in China.


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regime in China

Strategic decision drivers 1. WFOE Setup 2. M&A3. Technology Cooperation

(incl. JV)

If unfamiliar with China market

If access to markets is regulated or restricted

If local targets/partners are available

If products are different from those in the local market

If there is high market uncertainty

If the Chinese market is strategically or operationally critical

If there is limited capital available

Key points to consider when choosing your strategy This decision framework is a useful tool for C-Suite executives assessing options for expansion into China

LOW HIGH

LOW HIGH

LOW HIGH

LOW HIGH

LOW HIGH

LOW HIGH

LOW HIGH

LOW HIGH

LOW HIGH

LOW HIGH

LOW HIGH

LOW HIGH

LOW HIGH

LOW HIGH

LOW HIGH

LOW HIGH

LOW HIGH

LOW HIGH

LOW HIGH

LOW HIGH

LOW HIGH


Collaborating with the right partners 1

Recommended Workable Currently unpractical

UK established

FinTechs

UK FinTechstartups

Collaborate with China’s FinTech internet giants

Collaborate with

financial institutions

Collaborate with local

FinTech companies

Understanding the decision drivers for business setups

When considering growth in China, a successful product is not the only factor. It is equally important to make the right decisions about business setup and local partnerships

1 In our view, this is particularly important for Technology Cooperation, including the Joint Venture setup. More details in the Option 3 of the chapter.

a. b.

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regime in China

Recent examples of companies entering China using the WFOE structure

HSBC Group

In September 2020, HSBC Insurance (Asia Pacific) established a wholly owned subsidiary in Shanghai PFTZ Lingang new area, namely HSBC FinTech Service (Shanghai) Ltd. (HSBC FinTech Company). HSBC FinTech Company will initially provide technological innovation and digital empowerment for the HSBC Group's new mobile wealth planning service in China.

Gradually, HSBC FinTech Company is expected to support other domestic and international licenced financial institutions in China. The first phase of HSBC’s FinTech company in China will be focused on continuous R&D of tools for customised private wealth planning, R&D of employee benefits andhealth management platforms for enterprises, assistance in data integration and new data service products to comply with the current data security and privacy protection regulations in China.

Redington

Redington, a UK independent investment consultancy firm, established a WFOE in Shanghai FTZ in 2018, which also has a branch in Beijing. The WFOE of Redington is engaged in a range of activity including; internet technology, biometrics technology, software development and the provision of business and trade information consulting services.

Kasikorn Group

The first wholly owned FinTech subsidiary of a foreign financial institution was established in Shenzhen in June 2020. Kasikorn Information Technology Ltd (known as Kasikorn Information) and was established by Kasikorn Group, a well-known financial group in Thailand. The scope includes banking, insurance, security, financial lease and fund management. Kasikorn Information aims to improve the financial cooperation between China and Thailand, providing services including big data, AI and blockchain for Kasikorn Group and the group's customers.

Bloomberg

It is common practice to set up WFOEs in information consulting, technology consulting or other similar business in China by foreign FinTech companies. For example, Bloomberg established a WFOE in Beijing in 2009, which provides, amongst other things, financial information services.

In principle, if the WFOE only carries out general consulting services, there are no special foreign investment restrictions or requirements to obtain financial licenses or any minimum registered capital requirements.

Option 1: Wholly Foreign Owned Enterprise Despite the challenges, setting up a WFOE can be a successful route for large organisations

Source: Deloitte research, public information

Notes: The procedures of setting up a WOFE, or JV are discussed in Chapter 5


WFOE setup success stories

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regime in China

Mobile payments in China require mandatory licensing requirements which lead PayPal to pursue a M&A entry strategy

In January 2021, PayPal became the first foreign firm in China with full ownership of a payments business, and the only foreign company to acquire full ownership of a third party payment provider in China.

PayPal's entry into China demonstrates that obtaining a licence by acquiring an existing domestic license-holder can be a feasible approach and in some cases could be more practical and efficient than obtaining a licence from scratch as a WFOE.

Target: GoPay Information Technology Ltd. (GoPay Information) is a company with a third-party payment license in China. Before being acquired by Paypal, GoPay Information had two shareholders: (i) Beijing Zhirongxinda Technology Ltd (the "Beijing Company, a private enterprise) held 70% equity; (ii) GoPay Information Technology Development Ltd. (GoPay Development) a wholly owned subsidiary of China International Electric Commerce Center ( CIECC - a government-sponsored institution established by the Ministry of Commerce), held 30% equity.

Paypal carried out the acquisition via its WFOE established in Shanghai, i.e., PayPal Information Technology (Shanghai) Ltd (PayPal Shanghai). The acquisition was conducted in two separate steps:

Step 1: In November 2019, PayPal Shanghai acquired 100% equity of Beijing Company, therefore achieving a 70% indirect shareholding andbecoming the controlling shareholder of GoPay Information.

Step 2: In January 2021, PayPal Shanghai acquired the remaining 30% equity in GoPay Information held by GoPay Development, and therefore achieved 100% ownership in GoPay Information.

The graphic below outlines the details of the transaction.

PayPal case study

Option 2: Merger & AcquisitionIf access to a particular Chinese market is regulated or restricted in a way which prevents a WFOE, M&A offers an alternative entry strategy for FinTechs – as shown by PayPal’s example



PayPal Pte. Ltd.

(Singapore)

PayPal Shanghai

Beijing Company

GoPay Information

CIECC

GoPay Development Beijing Company

GoPay Information

Chinese Private

Company

Overseas

China

100% 100%

30% 70%

100%

30% 70%

100%

Step One

Step Two

After the acquisition Before the acquisition

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regime in China

Learning from the PayPal experience

Although formal foreign investment restrictions for foreign market players acquiring a domestic licenced company in the payment field have been eased, in practice there are still many considerations for government authorities.

As things stand, it is likely that government authorities will favour high-profile foreign FinTechs with a proven track record for M&A transactions with Chinese licence holders. Companies with good governance will be believed to bring leading industrial experience and be more compliant in terms of internal management and risk control.

PayPal is currently the only case where a foreign FinTech company has obtained its online payment license via acquisition of a Chinese licence holder, and it is symbolic.

UK FinTechs may want to follow this example if their aim is to carry out business that requires a financial licence, and whether acquiring a licence holder in China will be easier and faster than applying for a new one. However, the cost of acquiring a Chinese license holder may be substantial, and so SMEs will need to consider the feasibility of doing so.

Moreover, achieving control or even a 100% ownership of a Chinese licence holder is just the first step in entering the Chinese market.

Once a foreign enterprise has successfully set up in China, they will also need to consider how to compete with existing businesses. For instance, to extend their market reach, PayPal is aligning with a Chinese bank card company Union Pay, where Union Pay cardholders can add their Chinese card to the PayPal account, and use this card in countries where PayPal is accepted.

UK FinTechs should identify suitable targets in China based on their purpose, For example, to acquire a license they must ensure they can gain at least 50% control of the target from the seller.

Option 2: The M&A implications to UK FinTechsThe PayPal example illustrates how established UK FinTechs could carry out licenced businesses in China via M&A. It shows that gaining restricted market access through acquisition can be faster and more practical than applying for licences


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regime in China

If you are considering a Technology Collaboration there are three main routes to market

1) Collaborate with China’s FinTech internet giantsFinTechs can consider entering into an agreement with an existing technology giant. The benefit of this kind of cooperative agreements is that both parties will be able to benefit from each other’s strengths and channels. For instance, PayPal had already cooperated with Baidu and Alipay in a B2C area before its M&A, meaning that Chinese users of Baidu and Alipay have access to PayPal when using the cross-border e-commerce platform. Adyen, a fast growing United States mobile payment company, has entered into cooperation agreements with China UnionPay, Alipay, and WeChat Pay.

2) Collaborate with financial institutionsThis business model has been explored between BigTechs and existing banks in China. However, although the opportunity to collaborate with financial institutions does exist, the Chinese banking industry is relatively cautious, particularly around personal and financial data. Cooperation can be carried out in other areas such as a Chinese party acquiring ownership or a licence to use advanced technologies. Alternatively it could be possible to access product or service capabilities such as investment advisory services or access the overseas market via the foreign party’s international network.

3) Collaborate with local FinTech companiesTransferring or licencing technology to Chinese customers can be carried out directly by a foreign entity. In some cases, this could be a first step for some organisations in which they can establish a legal entity to start building a customer base.

Option 3: Technology CollaborationFor FinTechs not ready to create a WFOE - and if M&A is not an possibility - collaborating with an existing technology player can be a cost-effective option


Three main routes

IHS Markit & Hundsun Technologies

In 2019, the London headquartered FinTech, IHS Markit established a JV with the Chinese listed FinTech , Hundsun Technologies. The JV is aimed at providing technological solutions for the Chinese bonds market in terms of bookkeeping and issuance.

Finastra & Hundsun Technologies

In 2020, UK based Finastra announced a strategic cooperation with Hundsun Technologies. The parties will continue to develop the FusionInvest software which provides portfolio management solutions (PMS) for Chinese customers, including investment decision-making, risk management and investment valuation.

Danish Saxo Bank & Geely Holdings

A JV was established between the Danish Saxo Bank and Geely Holdings in Chongqing in June 2020. The company, based on Saxo Bank's financial technology capabilities, will use financial cloud services, big data, artificial intelligence and other advanced technology to provide solutions to Chinese financial institutions focused on investments, robo-advisor, asset management, risk pricing, and RegTech.

Note that the Geely Holding and Saxo Bank formed a JV offshore, and the company in Chongqing took the form of a WFOE, the owner of which is the offshore JV.


Technology Collaboration success stories

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regime in China

China Market Entry 101: general guidance on Chinese market entry for UK FinTechs

• With China opening-up quickly, foreign financial entities are entering the Chinese market at a much faster pace than expected.

• Chinese regulators tend to allow internationally recognised financial institutions to enter the newly opened-up areas first. This is because they are seen to offer more mature risk control and are more likely to be subject to strict regulatory supervision in their home country.

• While foreign investment restrictions such as limitations around the foreign shareholding ratio have been removed, the entrance approval threshold for the financial industry has been raised. This means it is more difficult to get a new license than obtain an existing one, through M&A or cooperating with already licensed local companies.

• Supervision of the FinTech sector has become stricter - mainly due to concerns about the emergence of systemic financial risks in the sector. The number of newly issued licenses within each of the six financial sectors has decreased year on year and in certain areas, such as mobile payments, some licenses have been cancelled for failing to satisfy regulatory requirements.

• Only a total of 19 privately owned banks have been established since the first privately owned bank, WeBank, opened for a trial run in 2014 (while at the same time, there are around 4,000 other types of banks, such as stated-owned banks, joint-stock banks and foreign invested banks). These examples indicate areluctance by the Chinese authorities to grant financial licenses to non-traditional players. Chinese authorities want to suppress the emergence of risks across the sector, such as fraud and cyber risk or the build-up of credit risk in the P2P sector, so we expect them to maintain high thresholds for approving new licenses.

Financial licenses are still relatively hard to come by in Chinaso Foreign FinTechs should first evaluate whether they will be engaged in a business that requires a financial license, bearing in mind that it is much easier to enter an area that does not require a financial licence, such as technology consulting.

After rapid development in the last decade, some major local FinTechs have established certain competitive advantages, accumulated many customers and extended branch networks to wide geographic areas.

It is essential for foreign FinTechs to make strategic plans and road maps to leverage their global capabilities to develop differentiated products and services and boost market share and revenue growth.

From InsurTech and Payment Tech to RegTech, there are common elements to consider when you think about a market entry strategy into China

Key takeaways


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regime in China

Step 1. Assess the opportunity

China is recognised as having the fastest rate of wealth creation in the world, generating approximately four new billionaires per week. A variety of international WealthTech players have begun to enter the race for Chinese assets but they are facing fierce competition from incumbents such as large state-owned financial institutions, tech giants and local niche FinTech players.

Product design Product features

Connect with clients through sophisticatedrelationship management

Obtain forward looking credit evaluations by using artificial intelligence (AI) on a comprehensive set of internal and external data

Create value through better customer understanding

Extract propensity predictions on product choices and investmentstrategies by creating a 360-degree view of the customer via big data analytics.

Capture returns through advanced delivery methods

Enhance robo-advisory to extract and pair market sentiments with existing customer risk profiles and tax considerations to provide informed, customer tailored, investment advice.

Step 4. Design a WealthTech product tailor-

made to Chinese consumer needs• Instant onboarding is a necessity

Chinese customers' user experience (UX) expectations have been conditioned over recent years by their experience of user-friendly payment apps and other tech. This sets a high standard for new WealthTech offerings, particularly as regards onboarding steps such as KYC.

• Choice of plenty over single source

Chinese customers have savvy consumer buying habits and are accustomed to competition and choice. Ecosystems created by giant e-commerce portals have become mainstream, not only for retail products, but all sorts of services, including financial products.

• Impatience with long customer service wait times

The Chinese consumer is well accustomedd to instant-access self-service models enabled by chat-bots, and computer visions. Chinese customers expectseamless interactions through their mobile and online channels and have low tolerance for call queues, or FAQ-based support.

Step 2. Research the development of the

WealthTech vertical in China

• Financial institutions with international competitiveness and industry influence are encouraged to conduct asset management business in Shanghai.

• So far, foreign-controlled firms like Nomura Securities and JPMorgan Securities have established subsidiaries in Shanghai. Amundi Asset Management and Bank of China Wealth Management have set up the 1st foreign-controlled wealth management JV in Shanghai.

£ Step 3. Deep dive into the characteristics of the

Chinese market

China Market Entry 101: tailor your productBefore entering China, it is critical to understand the marketplace, your likely competitors and consumer behaviour. To illustrate, we have taken a hypothetical case using a WealthTech as an example

An imaginary UK WealthTech is considering entering the China market. To ensure the FinTech product is appropriate for the China market, the CEO undertook the following initiatives before upgrading the product design


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regime in China

China Market Entry 101: right initiative, right place, right partnersBeing part of a Chinese government initiative could help UK FinTechs penetrate the market - the next step is to look for good partners in the best location

Wealth Management Connect (WMC), is a two-way schemewhich allows residents of Hong Kong and Macau to invest in wealth management products distributed by mainland banks in the GBA, and residents of mainland cities in the GBA to invest in wealth management products distributed by banks in Hong Kong and Macau.

Source: Deloitte Research

Scenario 1

Scenario 2

Cross boundary

Customer referral

Existing deposit account

Wealth management account opening

Wealth management

account opening Cross-boundary

Resident in GBA mainland

Bank in GBA mainland



WMC participating bank in Hong Kong/Macau

How Wealth Management Connect might work

For businesses under WMC, a GBA mainland resident would most likely be able to open a wealth management account with a bank in Hong Kong or Macau in one of the illustrated scenarios.

Subject to further details yet to be announced by regulators, banks with presences in Hong Kong and/or Macau, as well as the GBA mainland, can on-board customers more easily under Scenario 2 through intra-group customer referral.

In our WealthTech example, a China-ready product is on the shelf and the CEO is setting up a Technology Consultancy in the Greater Bay Area with an ambition to be a key player in the GBA’s Wealth Management Connect initiative


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regime in China

China Market Entry 101: embrace the steep learning curveThe speed of technological change in China means there are many unknowns for UK FinTechs – those prepared to learn at pace will be the most likely to succeed

While establishing the Partnership in GBA, our WealthTech CEO noticed an on-going technology innovation in data transfer at local banks which could potentially disrupt the company’s business model. To address this threat he immediately assembled a team to work closely with the banks

Traditional cloud serviceholding aggregated raw data from upstream data providers

Enhanced cloud service holding transformeddata from upstream data providers

Banks & FinTechs build the WM decision engine based on the internal and external raw data

Banks & FinTechs build the WM decision engine based on live, internal and external signals

+

Local machine learning

Bank’s internal data

Established practice in the UK Cutting-edge research in China

Distributed learning means that FinTechs can develop models on data located across financial institutions and borders- as long as a minimum level of consistency is ensured and a method is in place to combine the learning centrally.

Intuitive data structure Convenient for banks to

audit data sources

× Highly concentrated cyber risk× Difficult for cross-border data transfer

× Not applicable when involving

personal data (in light of GDPR)

…

Raw data upload/downloads

Data Source 1

Data Source 2

Data Source 3

Data Source 4

+Bank’s internally transformed data

A better, more secure cloud given data non-traceability features

Potentially feasible for cross-border data

transfer

× Education effort× Establishing new ways of working

…

Transformed data upload/download

Data Source 1

Data Source 2

Data Source 3

Data Source 4





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regime in China

Digital and online banking is on the rise in China - a large UK FinTech shares its experience and concerns

Perspective 1: Flagship UK FinTech exploring the China regulatory landscape

“Our primary concern is understanding the regulatory landscape, and how we can store and transfer data. China is a big market but getting to the core of ‘how’ to expand into it is key.”

- Head of Asia-Pacific Growth of a large UK FinTech

Which regulators can give a challenger bank approval?

Banks in China are regulated and supervised by the CBIRC.

More details about the license requirements for online banking can be found in chapter 3.

Can we store customer data outside of China?

Personal information or any other critical data collected or generated by key information infrastructure (including financial industry) operators in China should be stored locally. If this information and data must be transferred outside of China due to business needs, a formal security assessment must be conducted under the supervision of competent authorities. However, the security assessment rules have not been officially issued and so the requirements and procedures for cross-border transfer of data are currently unclear.

From an employee relations point of view, can we hire a representative in China without having a local entity set-up and what are the requirements for us as an employer?

Conducting regulated business in China without proper license is not recommended. Hiring employee in China without local establishment may create difficulties complying with welfare regulations and individual income tax withholding obligations. In addition, hiring employee in China without legal entity establishment may subject the foreign entity to Chinese tax as the foreign entity may be deemed as having permanent establishment in China by having employees working in China.

Alternatively, a foreign entity may establish a representative office in China which can collect market information and maintain client relationships, but which is not allowed to carry out any profit-making activities. In this case, any business contract would need to be entered into with the client by the head office outside of China. A Wholly Foreign-Owned Enterprise (WFOE), on the other hand, can carry out business activities and can enter into an employment contract with employees directly. Please refer to the Labour Law section on Chapter 5 for more details.

1

2

3


Source: China FinTech Report, South China Morning Post 2020

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regime in China

Understanding how and why Chinese consumers are investing is the challenge. A UK WealthTech offers some insight into commercial considerations and regulatory requirements

Perspective 2: UK WealthTech exploring business models in China

“From a commercial perspective, the first thing we consider is around client needs, and how we fit into those client needs. We also look for competitors to understand what’s already available in the local market”

- Head of Partnerships, European WealthTech

What are some of the investment trends that we are seeing from consumers in China?

Historically, a lack of transparency and a number of high-profile defaults and frauds have made Chinese investors wary of stock trading in China. High net worth individuals tend to be more willing to seek international financial solutions to enrich their investment portfolio. Generally, investments in China are diversified and typically include securities, funds, asset management products, futures, alternatives and insurance.

What are the key regulatory considerations for a company that primarily sells B2B in China?

In China, the financial services industry is strictly regulated which means that regulatory supervision may include requirements for investors' qualifications, licenses, daily operations, business structure, key financial index, sale of products, consumer protection, AML, etc. However, if you are looking to do business outside the financial sector in China, the regulation for general B2B services is comparatively straightforward.

What are some of the mechanisms to protect our company IP and brand?

The IP legal regime in China includes copyrights, patents, trademarks and trade secrets. IPs registered outside of China are also protected under international conventions and treaties which China is a party. China is improving IP protection and enforcement, and China is now ranking top on new patent and trademark registrations globally. More details are covered in Chapter 3 ‘IP Protection in China’.

What are the AML and KYC requirements in China?

In China, each financial sector has strict AML and KYC regulations. This includes the supervision of transactions, reporting of suspicious transactions and requirements around retaining clients' records. If AML or KYC duties are not carried out or breached, a legal person and the person in a position of responsibility (the natural person in charge) can be charged with criminal responsibility.

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We spoke to a leading UK FinTech, which specialises in credit assessments, about the considerations around risk and data collection

Perspective 3: UK Personal Finance FinTech on data sharing and transfer

“Expanding the business to China isn’t easy, our initial focus must be on understanding the local culture and attitudes towards data sharing. That is, to truly understand whether the culture is conductive to our services, and that the end user will be happy with sharing their data in a way that makes our services useful for local businesses.”

- CEO, Personal Finance FinTech

What are some of the consumer trends in China in relation to FinTech and data?

Although privacy has been debated both in China and globally, according to the South China Morning Post’s recent ‘China FinTech Report’, approximately 87% of consumers in China use FinTech services. With such large-scale penetration, consumption of FinTech services is becoming the norm and is likely to continue to grow. It is worth noting that the government is promulgating new rules to regulate this sector, ensuring that FinTechs or internet companies providing traditional financial services to be regulated the same way as the traditional financial institutions – as a result, we foresee a moderate impact on the growth.

What are the regulations around buying and selling data?

Buying and selling personal data, or data containing commercial secrets, is strictly prohibited in China and can lead to charges of civil and criminal liabilities. However, it is permitted to provide data analysis services. Operators of such services need to ensure they are compliant with the relevant data protection laws and requirements that exist in China.

How easy is it for a foreign FinTech to partner with a local bank to get the right levels of connectivity required to deliver services?

Broadly speaking, local banks are relatively open to cooperation with foreign FinTech companies. However, to date most examples of this kind of collaboration have been between Chinese FinTechs and banks. Dependent on the relative advantages of the foreign FinTech, cooperation could cover areas like financial information, investment advice or big data.

Are there any governmental or public bodies that a UK FinTech turn to to get support with setting up their business in China?

General investment information can be found on the “Investment in China” website (http://www.fdi.gov.cn/) run by the Ministry of Commerce. Local government authorities may also have English websites with investment information.

In addition, local commerce authorities and/or investment promotion bureaus also provide information regarding local investment opportunities. However, information provided by these local authorities may not be objective, as they tend to promote investments locally.


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“Cryptocurrency is early for a lot of people, and there are a lot of unknowns in terms of operating with it in different markets. For us, it’s important to understand how the regulations work, and where we can support local players to leverage our technology.”

- Head of Expansion, Leading Digital Currency Operator

We spoke to a digital currency FinTech about navigating through the Chinese marketplace – where Initial Coin Offerings have been banned but where the government is encouraging the development of Blockchain technology

Perspective 4: UK Digital Currency Operator seeking clarity about the marketplace

What are the regulations in China in relation to Blockchain technology?

There is no single regulation that covers Blockchain in China. However, the government has spoken in principle about supporting the development of Blockchain and is encouraging the combination of Blockchain and finance to boost the development of the financial industry. With this appetite for further Blockchain in many areas we expect to see more implementations in the near future.

What are the licencing requirements for operating digital currency in China?

Currently, the only digital currency legally supported in China is the CBDC issued by PBOC. Other digital currencies, such as Bitcoin, are not recognised as a type of currency in China, meaning they cannot be used to settle commercial transactions. A person in China is not forbidden from buying or selling Bitcoin, and there are some Bitcoin platforms in China, including Huobi, Binan, and OKCoin, but there is no regulation to specify which licence is needed for a Bitcoin transaction platform and the lawfulness of such platforms is controversial in China.

As a foreign enterprise, what are the key labour law considerations? For example, if a local employee is operating under a service contract, how is personal tax treated?

Compliance with Chinese labour law is really important and the labour law regime in China is generally pro-employee. Particular attention should be paid to when a labour contract should be signed and when a labour contract needs to be unilaterally terminated. Also, the requirements for hiring foreigners should also be noted.

Under a scenario where a service contract is signed between an entity outside of China and a Chinese individual, the individual would still be subject to individual income tax in China for any remuneration he/she receives under the service contract. In this case, the Chinese individual will have to file and pay the taxes locally in China.

It is also worth noting that if a Chinese entity (including a foreign invested entity in China) establishes a labour relationship with a Chinese individual, a labour contract must be signed.

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Source: Regulation of Cryptocurrency in China, JunZeJun Law Offices


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As the demand for wealth management services continues to grow in China, so does the need for investment platforms - this global platform FinTech believes understanding customer pain points is key

Perspective 5: WealthTech considering China market entry

“There has been a tendency to wheel out a very broad suite of instructions for FinTech companies in China – the fact is that a lot of the time Chinese companies will win in a lot of areas, so really understanding the customer pain points is key for market entry.”

- Head of Asia Strategy, Global PaaS Business

What are the cross-border tax implications, can we sustain and grow valuation through Transfer Pricing?

China offers a host of tax and other incentives to encourage R&D activities, IP self-development and so on, mainly in the form of income tax deductions and reductions in EIT rates. Super Deduction and Rate Deduction for HNTE are the main eligible tax incentives. See more details in Chapter 4 Understanding the Tax regime.

Is there a minimum capital requirement for FinTechs?

It depends on the intended business model and the industry in which you are planning to operate. However, if you intend to engage in a business that requires a licence, such as the mobile payment licence, you must meet the relevant minimum capital requirements (see more details in the Market Entry Section). Otherwise, there are no mandatory requirements for minimum capital investments.

When operating in China, would a company’s software source code need to be stored locally, and how is our source code IP protected?

Currently, there are no requirements for the localisation of the software source code. In addition, software is protected under Copyright Law, which provides for, among other things, civil and criminal responsibility for copyright infringements.

How extensive is the wealth management market in China?

The increasing number of wealthy people in China has driven the development of the wealth management industry. Families with totals asset of more than RMB 6 million (approx. GBP 0.67 million) in China exceeded 5 million at the end of 2019. Personal investable assets in China are estimated to grow at a compound rate of 10% from £17 trillion (160 trillion yuan) in 2019 to £32 trillion (287 trillion yuan) by 2025, with £8 trillion (69 trillion yuan) expected to be invested via online platforms by 2025 1.

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Notes: British Pound to USD exchange rate as of 31st January 2021


1 Source: 2020 China FinTech Report, South China Morning Post

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Chapter 3. Regulatory considerationsThe exponential growth of tech giants in China means the regulatory environment for FinTechs is continually evolving.

We provide an overview of China’s regulatory approach, explore the way China is flexing its own rules to encourage innovation and dig into the laws around cybersecurity, data protection and IP licensing.

Lastly, we explore the different licensing and governance structures required to operate in China.


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Central governmentauthorities

PBOC• Supervise financial services, such as issuing monetary regulations and

administering the interbank bond market and interbank clearing system.• In terms of FinTech, responsible for regulating online payments.

CBIRC

• Supervise banks, insurance institutions, finance companies, trust companies and other deposit-taking financial institutions.

• In terms of FinTech, responsible for online lending, online consumer financeand online insurance.

CSRC

• Supervise securities products and services providers in China, such as listed companies, securities companies, securities investment fund management companies and stock exchanges.

• In terms of FinTech, it focuses on equity crowdfunding and online fund sales.

SAFE• Although not a financial regulatory authority, SAFE is responsible for

supervising the foreign exchange market and cross-border payments/receipts.

Local authoritiesLocal Financial Supervision Bureau

• Responsible for the implementation of laws and regulations, as well as the supervision of financial activities in their respective regions.

• In terms of FinTech, responsible for the administration and implementation of innovative regulations in the FinTech area locally, such as the establishment of FinTech research centres.

The regulatory landscape continues to evolve in China. As part of the “FinTech Plan” (2019-2021), the PBOC has highlighted the need for additional regulatory intervention and financial risk prevention.


The regulatory regime in China is similar, but not quite the same, as the UK. However, the extent and complexity of the Chinese FinTech marketplace means it is not regulated by a single standalone body

Overview of the FinTech regulatory regime in ChinaChina’s exponential growth in the FinTech industry has been the source of much debate to regulators globally

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The introduction of the new Foreign Investment Law in China provides UK FinTechs with more protection and transparency to operate within the country’s borders

Foreign capital is now able to enter China more freely than before, paving the way for an accessible and buoyant FinTech market for foreign investors and start-ups.

This Foreign Investment Law aims to provide more transparency and protection for foreign investors, and stipulates "pre-establishment of national treatment“, referring to the treatment given to foreign investors and their investments during the investment access stage, which is not lower than that given to their domestic counterparts.

However, some foreign investment may still be restricted or even prohibited. The Negative List for Foreign Investment is a management model for foreign investment which is legalised by the Foreign Investment Law of the PRC. It refers to special administrative measures for the access of foreign investment in certain industries or areas.

All the general foreign investment restrictions, particularly relating to equity holding ratio in financial institutions, have been removed in the 2020 Negative List for Foreign Investment. However, there are still some general requirements for foreign-invested financial institutions, and the pre-establishment approval by the CBIRC and CSRC is generally mandatory for both domestic and foreign financial institutions.

The regulatory ground for foreign investment in China


The Foreign Investment Law, which came into effect in China on the January 1, 2020, presents a significant milestone for opening up

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Regulations also involve a series of supportive regulatory implementations, including encouragement of innovative research and development by enterprises, supporting the establishment and improvement of financial infrastructure and financial service platforms, facilitating education, medical care, housing for talents in the FinTech area, and providing special pensions for FinTech start-up enterprises.

Heilongjiang

Beijing

Hebei

Tianjin

Shandong

Shaanxi

Henan

Liaoning

Hubei

Sichuan

Chongqing

Jiangsu

Shanghai

Yunnan

Hunan

Guangxi Hainan

Guangdong

FujianZhejiang

Anhui

2013 2015 2016 2018 2019 2020

PFTZ’s in China as updated in 2020: New zones and expansion

Year FTZ was introduced

Pilot Free Trade Zones are experimental zones of innovative regulations and actions prior to their general application nationwide. They are governed by organisations including: the PBOC, the National Development and Reform Commission, the Ministry of Science and Technology, the Ministry of Industry and Information Technology, the Ministry of Human Resources and Social Security and National Health.

Supervisory practice in PFTZs

Some of the pilot areas issue their own local regulations to clarify new technologies that can be piloted by FinTech companies in particular areas. For example:

1) Apply AI technology in the area of client identification, anti-fraud, quantitative trading, investment consulting, client service, risk management and supervisory assistance.

2) Apply IOT technology in the area of supply chain finance, online payment, credit inquiry system and financing.

3) Apply cloud calculation and Blockchain technology in the area of financial supervision and risk control, inclusive financial system and sourcing system.

4) Apply data security technology, such as encryption, bio-information identification, in the area of digital identity, anti-fraud and data protection.


Supervisory innovation in China - Pilot Free Trade Zones China has established 21 Pilot Free Trade Zones (PFTZs) across the country. These areas experiment with new regulations to encourage different types of innovation to different areas

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Many PFTZs offer a range of business incentives making them good potential landing zones for UK FinTechs. As examples, here we take a closer look at Beijing and Shanghai

FinTechs in selected Pilot Free Trade Zones

Beijing PFTZs and FinTech

Beijing has formulated a series of pilot regimes - both in its recently established PFTZ and itsService Industry opening-up Pilot Zone.

These seek to:

1) Encourage FinTech projects aroundpayment and clearance, registration and custody, credit rating, asset transactions and data management to be launched in Beijing.

2) Support the development of FinTechinnovation activities by the introduction of FinTech innovation demonstration areas in Beijing financial Streets, the national FinTech demonstration zone and Lize Financial Business District.

3) Support the Digital Currency Institute of the PBOC to set up a FinTech centre and to establish a statutory digital currency pilot area and a digital financial system.

4) Form a trade finance Blockchain standard system based on the trade finance Blockchain platform of the PBOC, applying blockchain and other digital technology systems to regulate the implementation of cross-border trade, legal compliance and technical standards, and safeguarding paperless, dynamic and standardised multilateral cooperation in cross-border trade.

In 2019, SAFE established the Cross-border Financing Blockchain Service Platform (the "Platform"). This focuses on reducing the cost and facilitating the process of cross-border financing for small and medium enterprises by applying Blockchain technology in the registration and management of the Platform.

The Platform was first launched in Shanghai, Chongqing, Jiangsu, Zhejiang and Fujian for a trial run on March 22, 2019. On July 6, 2019, the application of the Platform was further expanded to Beijing, Shaanxi, Xiamen and Ningbo. The innovation programs in Beijing summarised the practice both in Beijing and other pilot zones, and further broaden and deepen the application of block technology in cross-border trade.

In addition, such regulations also involve a series of supportive regulatory implementations, including encouragement of innovative research and development by enterprises, supporting the establishment and improvement of financial infrastructure and financial service platforms, facilitating education, medical care, housing for talents in the FinTech area, and providing special pensions for FinTech start-up enterprises.


Shanghai PFTZs and FinTech

In the Lin-gang Special Area of the Shanghai Pilot Free Trade Zone a number of supportive policies and incentives are offered to attract innovative businesses as described below.

• Free Investment: Opening key industries for foreign investment and facilitating investment and business operation by establishing the business registration confirmation system and improving the mechanism of resolving civil and commercial disputes.

• Free Trade: Encouraging the development of Yangshan Special Comprehensive Bonded Zone, new international trade, cross border e-commerce and services trade.

• Free Capital: Supporting cross-border financial business, implementing the pilot program of integrating domestic and foreign currencies under free trade accounts and supporting overseas investors to establish financial institutions in China.

• Free Transportation: Expanding the functions of Lin-gang as a pivotal global port and further opening international shipping registration, tax rebate at the port of loading and international shipping services.

• Free Mobility of Practitioners: Easing the restrictions on recruiting high-calibreprofessionals in the modern service industry and granting them preferential treatment in entry-exit registration and permanent residence.

• Facilitating Quick and Convenient Flow of Information: Improving the internet infrastructure, promoting the safe flow of cross-border data and strengthening the protection of intellectual properties and data.

• Globally Competitive Tax System: Levying 15% of business tax on companies that play a core role in the key industries and granting subsidies to overseas professionals to offset the extra personal income tax.

• All-around Risk Management System: Tightening supervision on key areas and establishing a comprehensive service platform for information management to strengthen the credit rating management and network border security.

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Supervisory innovation in China - the Regulatory Sandbox Scheme

In a similar way to the UK scheme, the Chinese Regulatory Sandbox is designed to reduce the time it takes for innovation products, services and business models to go into practical use. It also aims to reduce cost, improve access to capital and maintain compliance

Product sourcing and supply chain finance system based on IOT technologyCity : BeijingPublished Date: January 14, 2020

Online financing service for small and medium businesses based on Blockchain technologyCity: ShanghaiPublished Date:July 21, 2020

Countryside-centred credit service system based on machine learningCity: ChongqingPublished Date:August 7, 2020

Financial risk control products faced by domestic retailors on cross-border e-commerce platforms based on BlockchaintechnologyCity: HangzhouPublished Date: August 14, 2020

Digital income ratification system for foreign citizens based on BlockchaintechnologyCity: ShenzhenPublished Date: July 31, 2020

Supply chain

Financing

Risk control& cross border

trading

Individualfinancialservice

Credit service

The regulatory sandbox mechanism encourages innovation by allowing direct communication between FinTechdevelopers, businesses and regulators, while mitigating the risks of unintended negative consequences

China introduced the sandbox scheme in Beijing in December 2019, with the aim of improving the supervision of FinTech innovation.

This was later expanded to eight more cities and districts in 2020, namely Shanghai, Chongqing, Shenzhen, Xiongan New Area of Hebei, Hangzhou, Suzhou, Chengdu and Guangzhou.

By the end of 2020, these nine cities and districts had published 65 innovative applications of which 59 involve the participation of financial institutions, such as banks. These applications mainly aim to assist enterprises solve key business obstacles, such as financing, risk control, supply chain management, and identical ratification - using leading technologies such as IOT, big data, Blockchain and API.

Selected applications are listed in the figure opposite. In addition, the CSRC has announced that it will establish a FinTech innovation pilot area in Beijing, which will formally accept enterprise applications from March 2021.

The term “Regulatory Sandbox” was first used by the Financial Conduct Authority (FCA) in the UK in 2015. It refers to a specific "security space" where FinTech companies are exempt from the application of certain financial regulations, so that they can innovate new products without worrying about violating existing regulations.

The adoption of a regulatory sandbox mechanism allows authorised businesses to test their innovative products, services, business models, and delivery mechanisms in the real market with real consumers, but on a trial basis.


The Regulatory Sandbox Scheme in China

The Regulatory Sandbox Scheme in the UK

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China is increasing the overall data security governance. The Data Security Law (Draft) makes top-level design to the data security protection in the country and also reflects China's determination in data security and safeguarding national data sovereignty.

Major laws and regulations in relation to cybersecurity and data protection in China include:

The Cybersecurity Law

The Decision of the Standing Committee of the National People's Congress on Strengthening Network Information Protection

Provisions on Protecting the Personal Information of Telecommunications and Internet Users

Administrative Measures for the Graded Protection of Information Security

The introduction of the Cybersecurity Law in 2016 was a milestone in the legislation process, providing the basic framework for cybersecurity and data protection in China. A series of regulations and guidelines have followed (although some of these are not yet officially promulgated) to address more detailed concepts introduced under the Cybersecurity Law. This legislation will provide guiding principles for subsequent laws and regulations including:

Regulations on the Protection of the Security of Key Information Infrastructure (Draft)

Guidance for the Scrutiny and Evaluation of Key Information Infrastructure (Draft)

Measures for Cybersecurity Review

Administrative Measures for Data Security (Draft)

These laws and regulations make up the legal regime that is generally applicable to ‘network operators’ – the term used to describe organisations that provide either network infrastructure or online services, or both.

As such, FinTech market players that 1) provide services online, such as mobile payment and cloud service providers for financial institutions, and 2) are engaged in the construction of network infrastructure such as big data, including Blockchain technologyproviders, should all be regarded as network operators.

Cyber Security Law in China - an introductionDue to the booming development of the internet, and its related technologies, legislation around cybersecurity and data protection in China has accelerated in recent years


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General Requirements

General rules for collection and use of personal data

Requirements for electronic information distribution service providers

Main regulators

Cyber Security Law in China - the Civil CodeChina is ramping up its laws around the protection of personal information - we have identified four key areas to consider


• General Requirements

In China’s Civil Code, which came into effect on January 1, 2021, the protection of personal information is provided as a basic civil right. In addition, the Personal Information Protection Law, Data Security Law and the Administrative Measures on Data Security Management have been drafted and released for public comment. Once enacted, these laws and regulations will have a far-reaching impact on the protection of personal information as well as business and compliance practices for companies.

The Cybersecurity Law demands several requirements of network operators including: Establishing internal security management systems, designating a person in charge of cyber security, developing technologies used for preventing computer viruses, monitoring and recording network operations and improving the protection of important data by means of data classification, backup and encryption.

• General rules for collection and use of personal data

To collect and use personal information, network operators need to disclose their rules of data collection and use, clearly express the purposes, means and scope of collecting and using the information and obtain the consent of the persons whose data is gathered. Network operators cannot divulge, tamper with or damage the personal information they have collected, and cannot provide the personal information to others without the consent of the person whose data is collected.

• Requirements for electronic information distribution service providers

If a FinTech (which needs to conduct business electronically or via application software) discovers that a user of their services has unlawfully transmitted information, they would need to stop the provision of their services, delete the information and report the misconduct to the relevant competent authorities.

• Main regulators

In addition to the CAC, which is the major authority for the enforcement of the Cybersecurity Law, another important regulator is the Ministry of Industry and Information Technology, which oversees the regulation of personal data collected and used in telecom and internet sectors.

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Personal information and data gathered and produced during operations within China have to be stored locally in China.

Main Regulators

There is no single regulator responsible for cybersecurity matters. The major regulators involved in this area are:

• The Cyberspace Administration of China (CAC), the main authority responsible for enforcement of the Cybersecurity Law

• The Ministry of Public Security (MPS) which is a ministry-level organisation under the State Council, in charge of public security in China and responsible for internet control and security

Cyber Security Law in China - implications for cross-border data transferThe free movement of data is one of the key features of an open economy and restrictions in this area were raised as a major concern by CEOs in our FinTech Perspectives interviews


Cross-border data transfer

Although there is no specific provision in any laws or regulations, the Measures for

Cyber Security Review have specified some requirements for network operators in

cross-border data transfer, including:

• Network operators are required to file an application and obtain approval

before transferring personal information outside China

• There is a requirement for a security assessment for each data recipient with

an update every two years - or whenever a change occurs regarding the

purpose, data type, or retention period of data transferred

• Offshore entities that collect personal information from China must comply

with these requirements through their onshore legal representatives or

institutions

• Network operators are not allowed to transfer personal information when the

transfer jeopardises the individual's interests, endangers national security or

public interests, or inadequately protects personal information.

It is worth noting that in some of the master plans of recently established PFTZs,

such as Hainan Free Trade Port and Beijing Free Trade Zone, there are proposals

to explore the formulation of regulations for the cross-border transfer of data.

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IP Protection in China - Copyrights, Patents

Big data, Blockchain and artificial intelligence, which are mostly applied to computer software, are the most important tools for FinTech development. In China, computer software is protected by copyright law, which includes the Copyright Law, Regulations on the Protection of Computer Software and Measures for Registration of Computer Software Copyright. These laws and regulations set outthe basic principles for computer software copyright, including:

• The software being registered should be independently developed software or software where important improvements have been made in terms of the functionality or performance of the original software through changes being made to the software with the approval of the original copyright owner

• When another party is to be licensed to exclusively exercise the software copyright, the parties must include a written contract

• The protection period for software copyright of a company is 50 years, concluding on 31 December of the 50th anniversary after the software's initial release

In China, the National Copyright Administration (NCA) is responsible for the administration of copyright nationwide; the local branches of the NCA are responsible for administration of copyright within their administrative regions. In addition, China is also a member of "Berne Convention for the Protection of Literary and Artistic Works“ (Berne Convention) and some other international intellectual property treaties. The protection of the Berne Convention applies to authors who are nationals of one of the countries of the Berne Convention, including the UK, for their works, whether published or not.

In China, the Patent Law protects the legitimate rights and interests of patentees, encouraging invention-creations, including invention, utility model or design. If any FinTech technology is patentable, the owner can file for patent application with the China National Intellectual Property Administration to ensure their patent is protected in China.

The duration of patent right protection for an invention is 20 years, the duration of patent rights protection for a utility model is 10 years and the duration of patent rights protection for a design is 15 years. This starts from the filing date and is subject to payment of renewal fees and the patent not being invalidated.

China and the UK are both contracting parties to the Paris Convention and the Patent Cooperation Treaty. Therefore, patent applicants who have applied for patents in the UK (or another contracting party to the above international treaties) are entitled to a right of priority when they file for patent applications in China.


For any business looking to operate in China, a thorough understanding of these key laws will be necessary from the outset

Notes:

• Copyright Law of the People’s Republic of China, revised in 2020• Patent Law of the People's Republic of China, adopted at the Fourth Session of the Standing Committee of the Sixth National People's

Congress on March 12, 1984, revised by the National People's Congress on June 1, 2020 and will be effective on June 1, 2021

1. Copyright 2. Patents

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IP Protection in China - Trademarks and Trade secrets


The Trademark Law sets out guidance in relation to trademarks and trade secrets

Notes:

• Trademark Law of the People's Republic of China, revised by the National People's Congress on November 1, 2019.

3. Trademarks 4. Trade secrets

Trade secrets refer to commercial information, such as technical information and business operation information, which is not known to the public and has commercial value for which the holder has adopted corresponding confidentiality measures.

For information that qualifies as a trade secret, the recipient is under a statutory duty to keep the information confidential, no matter whether a confidentiality agreement has been entered into or not.

Moreover, it is common for two parties in a business relationship - where disclosure of confidential information is inevitable (for example an M&A transaction) - to enter into a non-disclosure Agreement or Confidentiality Agreement. In this situation, parties are permitted to specify the scope of confidential information to be disclosed as well as the activities prohibited to be taken in relation to the disclosed confidential information in addition to those provided by law.

Trademarks that can be registered under the Trademark Law need to possess distinctive characteristics to facilitate identification and shouldn’t conflict with prior legitimate rights obtained by others. The trademark registrants enjoy exclusive rights to use the trademark for goods or services verified by and designated in the registration and are protected by the Trademark Law.

The legal rights of trademarks arise when they are registered with the China National Intellectual Property Administration (CNIPA). Registration in China is on a “first-to-file” basis that does not require evidence of prior use or ownership, although well-known trademarks, even unregistered, may receive protection in relation to the goods or services for which they are well-known.

A registered trademark is valid for 10 years, commencing on the date of registration. The registration must be renewed every 10 years to remain in force.

China and the UK are both part of the Madrid Agreement Concerning the International Registration of Marks. So, holders who have already filed an application for a trademark in the UK will have a right of priority when applying for trademark registration in China, provided that an application is submitted within six months of filing the first application.

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Introduction

Since joining the World Trade Organisation in 2001, China's IP legal regime has gradually aligned with international standards. Now, a complete system of IP protection, application and management has been established by the legal, planning, policy-making and executive agencies in China.

From the granting of IP rights and the exercise of IP rights to the protection of IP rights, there are corresponding institutional supports which provide protections for foreign enterprises to enter the Chinese market.

China is a contracting party to most international IP conventionsand its IP laws and regulations are now aligned with the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS).

According to research conducted by the China Pingan Group, since 2017 more than 230,000 FinTech related IP applications have been made. Of these, more than half of all FinTech patent applications came from Chinese applicants and over 80% pf FinTech trademark applications came from Chinese applicants.

The cities of Beijing, Shenzhen, Shanghai, Guangzhou and Hangzhou have the most patent andtrademark applications.

47

54

Other Chinese Applicants

13

87

Other Chinese Applicants

Patent Applications % Trademark Applications %

230,000+IP applications related

to FinTech since 2017

IP Legislation

China is determined to level up the IP legislation, consolidating the institutional basis for protecting IP under the law, improving the level of IP protection, and promoting innovation and development of the economy and society. As an example, China recently revised its Copyright Law, Patent Law, Trademark Law and Anti-Unfair Competition Law to fortify IP protection. The changes include uplifting the costs of IP infringement and easing the production of evidence.

IP Protection in China - FinTech patent applicationsHow intellectual property protection is treated plays an important role in creating a favourable business environment –China’s approach broadly aligns with the World Trade Organisation


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IP Protection in China - Infringement

Penalties & Enforcement

Under the Chinese IP legal regime, an IP infringement may entail civil, administrative and even criminal liability if the circumstances are serious.

China implements an IP protection system that focuses on judicial protection and parallel administrative protection.

The current IP trial system in China consists of the Supreme People's Court Intellectual Property Tribunal, the Intellectual Property Court, 32 high courts, three IP courts (Beijing, Shanghai and Guangzhou), and several intermediate and basic courts. The principal remedies available in civil litigation concerning IP include injunctions and damages.

From the administrative protection perspective, the General Administration of Market Supervision has set up a special law enforcement inspection bureau which undertakes the organisation of law enforcement for trademark, patent, and other IPs. Rightsholders who consider their IP right being infringed may file administrative complaints to the competent administrative authority, which can result in administrative penalties being imposed on the infringer.

The administrative enforcement of IP has become an important part of the comprehensive enforcement of

market oversight over IP rights.

At present, 38 IP protection centres have been set up nationwide in 22 provinces including seven "provincial" protection centres and 24 "municipal" protection centres. These cover more than 20 industries, including new-generation information technology, high-end equipment manufacturing, bio-medicine, and new materials.

These measures give market players convenient, efficient, and low-cost means of IP rights protection. China has also formulated and refined standards for trademark/patent infringement judgment, inspection, and appraisal, and has issued guidelines for administrative ruling on patent infringement disputes, which have improved the effectiveness of administrative protection of IP.

The enforcement of IP law is taken seriously in China and can result in civil, administrative and criminal liability


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Licensing Requirements - Mobile Payments & Internet Banking

The applicant for Payment Business License shall satisfy the following conditions:• Is a limited liability company or stock limited company established in China, and a non-financial institution with legal person status;• Where an applicant intends to engage in payment business on a national scale, its minimum registered capital shall be RMB 100,000,000; where it intends to engage in payment business

within a province (autonomous region, municipality directly under the Central Government), its minimum registered capital shall be RMB 30,000,000. The minimum registered capital shall be paid-in monetary capital;

• Have more than 5 senior management personnel familiar with payment business;• Have well-established anti-money-laundering measures system;• Have payment business facilities that meet the requirements;• Have a sound organisational structure, internal control system and risk management measures;• Have business offices and safety precautions; • The applicant and senior management personnel thereof is free of punishment for committing any illegal criminal activities by abusing payment business or handling payment business for

illegal criminal activities for the latest 3 years.

The major shareholders of an applicant shall satisfy the following conditions:• Is a limited liability company or stock limited company;• Up to the application date, having provided information processing support service for financial institutions for more than two years consecutively or have provided information processing

support service for e-business activities for more than two years consecutively;• Up to the application date, having made profits for more than two years consecutively; • Free of any punishment for committing any illegal criminal activities by abusing the payment business or handling payment business for illegal criminal activities for the latest 3 years.

The "major shareholders" means the shareholders that have the right to actually control the applicant or that hold more than 10% of the equities of the applicant

• Legally established and have legal personality;

• Have good corporate governance and effective organisational management, have a good social reputation, credibility records, and tax records;

• Have a long development period and stable business performance;

• Have strong management capabilities, financial strength, financial condition, and assets condition;

• Have been consistently profitable in the recent three fiscal years, have net assets of more than 30% of the total assets after the year-end distribution;

• The equity investment balance shall not exceed 50% of net assets.

Type of Business

Type of License

Regulatory Authority

Mobile Payment

Payment Business License

PBOC

Internet Banking

Banking License

Type of Business

Type of License


CBIRC

FinTechs looking to expand in China will need to understand the different licensing requirements which vary depending on business area. In the next four pages we describe the license qualification requirements for the majority of UK FinTechs

Licensing qualification requirements for mobile payments and internet banking


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regime in China

Type of Business

Type of License


Internet Securities

Business License for Securities or Futures Operator

CSRC

Type of Business

Type of License


Agencies providing information technology services for funds management

Consumer Finance License

CBIRC

• Have a good financial position and regulated operation;• Have business premises, security protection and other facilities commensurate with fund distribution business, and its information management platform for handling fund distribution

business complies with the requirements of the CSRC;• Have sound and efficient business management and risk management systems, its systems for anti-money laundering, counter-terrorism financing and due diligence on tax-related

information in terms of non-resident financial accounts, etc., comply with the requirements of laws and regulations, and its systems for fund distribution settlement capital management, investor eligibility management, internal control, etc., comply with the requirements of the CSRC;

• Have not less than 20 persons who have obtained the fund practice qualification;• Have been subjected to neither a criminal penalty nor major administrative punishment during the last three years; it has been subjected to no major administrative regulatory measures

due to any analogous business during the last one year; it does not fall within the rectification period due to any major act in violation of laws and regulations, or is under investigation by the competent regulator due to being suspected of committing any major act in violation of laws and regulations; it involves no matter concerning a major alteration that has affected or may affect the normal company operation, or major litigation, arbitration, etc.

• Have never received any administrative sanction or major regulatory measure from a regulatory authority due to illegal financial activity, the breach of relevant provisions of any financial regulatory department, the provision of information release services for any illegal financial activity or any other circumstance in the recent three years;

• The information technology service agency or its controlling shareholder, its actual controller or any other information technology service agency controlled by its actual controller has not had any record of material securities or futures illegality or irregularity in the recent year;

• Have safe and stable information technology service capability;• It has prompt and efficient emergency response capability;• It is familiar with relevant securities and funds business, and has the capability to continuously evaluate whether its information technology products and services meet the regulatory

requirements;

Licensing Requirements - Internet Securities & Technology Agencies

Licensing qualification requirements for internet securities and technology agencies


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Type of Business

Type of License



Consumer Finance License

CBIRC

The applicant for Consumer Finance License shall satisfy the following conditions:• have articles of association in accordance with the Company Law of the People's Republic of China and provisions of CBIRC;• the registered capital of a consumer finance company shall be a one-off paid-in capital in cash and the minimum amount is CNY300 million or an equivalent amount in any freely

convertible currency;• have eligible directors and senior managements and qualified practitioners familiar with consumer finance business;• have sound systems for corporate governance, internal control and risk management, as well as a management information system suitable for its business;• have places of business, safety measures and other facilities suitable for its business.

A financial institution served as the major shareholder of a consumer finance company shall satisfy the following conditions:• have over five-year practice experience in the consumer finance field;• the total asset as at the end of the latest year is no less than CNY60 billion or an equivalent amount in any freely convertible currency (on consolidated accounting statement basis);• have good financial position with earnings realised in the latest two fiscal years (on consolidated accounting statement basis);• have good reputation without any record of material illegal or irregular operations in the latest two years;• make contribution with funds from a true and legitimate source other than loan funds or entrusted funds;• make a commitment that its equities in the consumer finance company will not be assigned within five years (except as otherwise required by the banking regulatory institutions in

accordance with the law), which shall be included in the articles of association of the company to be established;• have a sound corporate governance structure, internal control mechanism and risk management system;• satisfy the requirements of prudential regulation indicators of the regulator in the country or region where the institution is located;• have, in case of an overseas financial institution, a representative office in China for more than two years or a branch which has sufficiently analysed and researched the Chinese market;

moreover, the financial regulator in the country or region where the institution is located has established a good cooperative mechanism on regulation with CBRC.

A non-financial institution served as the major shareholder of a consumer finance company shall satisfy the following conditions:• the operation revenue as at the end of the latest year is no less than CNY30 billion or an equivalent amount in any freely convertible currency (on consolidated accounting statement basis);• the net asset as at the end of the latest year is no less than 30% of total assets (on consolidated accounting statement basis);• have good financial condition with earning realised in the latest two fiscal years (on consolidated accounting statement basis);• have good reputation without any record of material illegal or irregular operations in the latest two years;• make contribution with funds from a true and legitimate source other than loan funds or entrusted funds;• make a commitment that its equities in the consumer finance company will not be assigned within five years (expect as otherwise required by the banking regulatory institutions in

accordance with the law), which shall be included in the articles of association of the company to be established.

Licensing qualification requirement for internet consumer finance


Licensing Requirements - Internet Consumer Finance

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regime in China

Licensing qualification requirements for the banking, insurance and securities sectors

Type of Business

Type of License


Internet Insurance

Record-filed by licensed insurance company or insurance intermediary

CBIRC

• Service access place is located within the territory of China; • Has an information management system and core business system that can support its internet insurance business operation, which can be effectively isolated from its other unrelated

information systems;• Has refined cybersecurity monitoring, information notification, emergency disposal working mechanisms as well as such cybersecurity protection means as refined perimeter protection,

intrusion detection, data protection and disaster recovery;• Implements the national classified cybersecurity protection system, carries out filing of cybersecurity classification, conducts classified protection evaluation on a regular basis, and

implements security protection measures for the corresponding class;• Has a legal and compliant marketing model, and has established an operation and service system that meets the needs for internet insurance operation and complies with the

characteristics of internet insurance users while supporting its business coverage regions;• Has established or defined its internet insurance business management department staffed by appropriate professionals, appointed a senior executive to act as the principal in charge of

its internet insurance business, and specified the principal of each self-operated network platform;• Has a sound internet insurance business management system and operating procedures;• As an insurance company, it shall, when conducting internet insurance sales, comply with the relevant provisions of the CBIRC on regulatory evaluation of its solvency as well as protection

of consumers' rights and interests, etc.;• As a professional insurance intermediary, it shall be a national institution with its operating area not limited to the province (autonomous region, municipality directly under the Central

Government, or city specifically designated in the state plan) of the place where the business license of its head office is registered while complying with the relevant provisions of the CBIRC on classified regulation of professional insurance intermediaries.

Licensing Requirements - Internet Insurance


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Chapter 4. Understanding the Tax RegimeExpanding into China means making new tax considerations. This chapter provides an introduction to the current Chinese tax regime for foreign enterprises.

Understanding the tax regime in China

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regime in China

WFOE1 M&A2

Technology Collaboration3

Tax Considerations for our three market entry strategiesA FinTech’s tax liabilities in China will vary depending on your entry strategy – we have assessed the different tax implications based on a WFOE, M&A or Technology Cooperation approach

For a WFOE incorporated in China to operate as a FinTech business, the main applicable taxes will be Enterprise Income Tax (EIT), Value-added Tax (VAT) and its local surcharges, Individual Income Tax (IIT) and Stamp Duty (SD).

There can be detailed tax implications dependent on the specific business of a WFOE. There is no special tax regime for FinTech enterprises. Meanwhile, complexities or uncertainties may arise in innovative scenarios. We would recommend performing a case-by-case analysis based on prevailing tax rules and taking into account tax bureau's practices for the relevant industries.


For FinTech businesses considering M&A to operate in China, additional tax considerations at the acquisition stage would need to be considered, primarily around EIT and SD.

For EIT purposes, if the original shareholder of the target company is a PRC tax resident, the capital gain derived from disposal of the equity would be captured as its taxable income. With the original shareholder being taxed appropriately, the new foreign shareholder would be able to adopt the stepped-up tax base for deduction in future exit, if any.

For SD purposes, equity transfer agreements belong to the specified types of dutiable document. If the agreement is executed or received in China, it should be subject to PRC SD, and both contracting parties would be the obligator.

Some foreign FinTech companies may choose to build up cooperation with local FinTech market players through contractual arrangements and receive payments from the local co-operator.

The payments received from the local co-operator (if any) would need to be assessed from PRC VAT and EIT perspectives, with considerations on the nature of payments, whether people have been dispatched into China, etc.

SD4Local surcharges3EIT1 VAT2 IIT5

Tax Rate = 25% For domestic sale of services (excluding leasing/transportation/post/basic telecom/construction), General taxation method: 6%Simplified taxation method: 3%

Filed and settled on a monthly/quarterly basis, within 15 days after month-end or quarter-end.

The calculation basis is VAT paid. Generally, the rates are: • City Construction and

Maintenance Tax: 7%• Educational Fee

Surcharge: 3% • Local Educational Fee

Surcharge: 2%

Filed and settled on a monthly/quarterly basis along with VAT.

The dutiable documents are specified under SD rules. Examples include: -Property leasing contract: 0.1%-Loan contract: 0.005%-Business account book: 0.05%

Subject to local filing procedures, filed and settled on a monthly or a quarterly basis, where any dutiable document is signed during the monthor the quarter; or by transaction, as soon as the dutiable document is signed.

Filed and settled provisionally, generally on a quarterly basis, within 15 days after quarter-end, followed by an annual final settlement within 5 months after year-end.

For the employed individuals, as part of their "Comprehensive Income", the employment salary income are subject to progressive tax rates ranging from 3% to 45%

Filed and withheld by the employer on a monthly basis, within 15 days after month-end; the employee shall perform annual filing where necessary.

General Tax rates and filing requirements in China

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The two tax incentives most likely to be applicable for FinTechs are Super Deduction and Rate Deduction from High and New Technology Enterprise (HNTE)

Super Deduction Rate Deduction for HNTE

The Chinese government has launched a preferential EIT policy of “R&D expense super deduction”, i.e. an additional 50% deduction before EIT could be taken based on the actual qualified R&D expenses incurred by in scope PRC companies. From January 2018 to December 2020, the super-deduction rate rose from 50% to 75%. The PRC enterprise, as a consignor, would be eligible for super deduction based on 80% of the expenses incurred for the R&D activities outsourced, but for overseas entities, provided that the expenses do not exceed 2/3 of its total eligible R&D expenses incurred domestically.

“R&D activities” refer to activities with clearly defined purposes on a continuous basis and which are systematically carried out in order to derive new science/technology knowledge, including:• Applying new science/ technology knowledge in an innovative manner or;• Improving current technologies, products/services or techniques substantially

The following seven types of activities are excluded from R&D activities under the current super deduction regime:• Routine upgrades of products/services• Simple application of R&D results, such as direct application of public techniques, materials, devices,

products, services, or knowledge • Technical support to customers after commoditisation• Repeated or simple changes made to existing products, services, technologies, materials or processes• Research on market, efficiency or management• Regular quality control, test and analysis• Research on social sciences, arts or humanities

To enhance the state’s innovation competitiveness, the Chinese government also provides a reduced EIT rate of 15% for companies being granted the HNTE status.

The HNTE qualification must be applied and renewed every 3 years.

The Chinese government provides the following list of eight state-encouraged industries considered to be HNTE:

• Electronic information• Biology & new medicine • Aviation & space• New materials• High technology service• New energy & energy conservation• Resources & environment• Advanced manufacturing and automation

Qualified activities include development of new technology, new products, and new production techniques. Qualified expenditure include staff costs, direct costs, supplies, depreciation and amortisation, design costs, equipment installation costs, intangible asset amortisation, and contracted R&D costs.

Tax incentives in ChinaTo encourage competition and innovation, the Chinese government offers a number of tax incentives on Enterprise Income Tax


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regime in China

Over the past years, it has been observed that information required to be disclosed should be more transparent and the information exchange between tax authorities of different jurisdictions are expected to be much more extensive and efficient.

In June 2016, the Bulletin [2016] No. 42 of State Taxation Administration (SAT) of the PRC introduced a three-tier documentation framework, as set out in the OECD's framework in BEPS Action 13.

The compliance requirements for FinTechs may differ based on the areas in which they operate, requiring more attention to the reasonableness of related-party transactions involved.

Transfer Pricing (TP) considerations

Local File Special Matter FileMaster File

Enterprises will have to prepare local files if their annual amount of related party transactions satisfy any one of the following criteria:• The amount of transfer of ownership of

tangible assets (for processing of supplied materials, computed in accordance with Customs declaration prices in the year) exceeds RMB 200 million

• The amount of transfer of financial assets exceeds RMB 100 million

• The amount of transfer of ownership of intangible assets exceeds RMB 100 million

• The total amount of other related party transactions exceeds RMB 40 million.

Enterprises will have to prepare special issue files if they satisfy one of the two following criteria: • An enterprise which has entered or

executed a cost-sharing agreement• The related party debt equity ratio of the

enterprise exceeds the standard ratio, and it is required to state whether the independent transaction principle is complied with.

Enterprises will have to prepare master files if they satisfy any of the following criteria:• Cross-border related party transactions

have occurred in the year, and the enterprise group that the ultimate holding enterprise belongs to and has consolidated the enterprise's financial statements has prepared master files

• The total amount of the related party transactions in the year exceeds RMB 1 billion.

Transfer Pricing considerationsThe laws around transfer pricing in China could benefit from higher levels of transparency


Cross Border Payment

In addition to tax considerations in relation to the PRC enterprise itself, there are also withholding tax implications associated with the cross-border payments (e.g., dividends, interests, services fees, royalties), where the foreign recipient is the taxpayer, and the domestic payer serves as the withholding agent.

The standard withholding EIT rate is 10%, if no Permanent Establishment implications. The withholding VAT rate is 6% (excluding dividends which are not subject to VAT).

As relief may be available under a relevant tax treaty between China and the resident country of the shareholder, the shareholding structure needsto be assessed ahead before the foreign FinTech companies entering China for tax efficiency purpose, in consideration of profits repatriation or future exits.

Together with possible tax treaty benefits to be enjoyed, it is important to note the local requirements for beneficial owners from a PRC perspective and the filing and documentation retention requirements for treaty benefits application.

Notes: Where an enterprise only has related party transactions with related parties in China, it may opt not to prepare the master file, local file and special matter file.

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Chapter 5. Onshore setup and employee relationsThis chapter covers the practicalities of setting up a Foreign Invested Enterprise, such as a WFOE or Joint Venture, and introduces China’s labour laws - including some key facts around hiring and firing for both Chinese and foreign nationals.

Employee relations

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regime in China

• Pre-approval from a competent authority if the investments fall into the negative list for foreign investments;

• Pre-approval from relevant industrial supervision authority, such as investments in the financial sector; or

• Anti-trust notification for concentration, in case of an M&A where the prescribed notification threshold is met.

If pre-approval is needed, the investor should obtain the pre-approvals first before the registration with the competent Administration for Market Regulation (AMR).

AMR registration for a business license and initial investment report for foreign investments with the local commerce authority. The brief procedures of a FIE AMR registration is as follows:

• Pre-verification of company name

• Prepare Articles of Association of the company, other relevant legal documents (e.g. identify certification documents of the shareholders, appointment documents of legal representatives, board members and other officers) and fill out application forms

• Obtain an office lease

• Upon registration, a business license will be issued and the company is legally established

• Carving of company’s official seal with the local public security authority

• Open bank account(s) and foreign exchange registration with a chosen commercial bank

• Tax registration with the local tax authority; and

• Registration of social security fund and housing fund accounts.

The most common form of foreign invested enterprises (FIE) in the FinTech industry is limited liability companies, in the form of WFOE or JV. The establishment procedure for a WFOE or a JV is the same, except that in the case of a JV, a JV or shareholder agreement covering business, operations and governance matters will typically need to be signed

Pre-Approvals (If applicable)

High-level process for WFOE & JV setup

AMR & Other Registrations

Setting up a FIEEstablishing a Foreign Invested Enterprise (FIE) in the form of Wholly Foreign Owned Enterprise, or Joint Venture, is the most common method for FinTechs to access and operate in China

Employee relations

Wholly-owned foreign enterprises

(WFOE)

Sino-foreign joint

ventures (JV)

Foreign-invested

partnerships (FIP)

Representative Office (RO)

WFOE and JV and the most popular FIE structures in China

Notes:

We have not covered the options of M&A and Technology Collaboration as part of onshore setup, because that, i) M&A is a complex process and institutional specific, ii) Technology Collaboration does not necessarily require setting up a FIE.

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1Labour Contract

2Notification

The foreign national should apply for a Z visa (work visa) or R visa (high-level talent visa) from a Chinese embassy or consulate in the employee’s home country.

Chinese hosting agency should apply for work permit with labour authority and foreign national should register for residence with local public security bureau.

After the foreign national obtains a work permit, they must apply for a long-term worker residence permit with the local ‘Public Security Bureau’.

3Apply for Visa

4Work Permit

5Residence Permit

Enter a labour contract between a Chinese hosting entity and foreign national.Or a secondment letter should be issued by a foreign employer.

The Chinese entity should apply for a notification letter for the foreign national’s work permit in China through the designated online system.

In China, the workingrelationship between employers and employees is governed principally by the Labour Law and Labour Contract Law - as well as their respective implementation rules and other related regulations.

These laws and regulations determine some basic rules such as the working hours and rules for paid leave, the requirement for labour relationships and the rules for termination of employment.

How foreign nationals can work in china?

1. Employment ContractsAn Employment Contract is required under Chinese law if the employee’s place of work is in China, the employer is established within China, and an employment relationship exists between the employer and the employee. However, in some circumstances, it is possible for foreign nationals to work in China under a foreign law governed employment relationships (see below).

An employment contract must include some mandatory provisions, such as the term of employment, job duties, location, working hours, days off, vacation days, remuneration, social insurance contribution, working conditions and the labour protection. It may also include certain optional terms, such as confidentiality obligations, non-competition agreement, employee training and minimum service periods.

2. Employment of foreign nationalsA foreign national can be directly hired by a Chinese legal entity or seconded by a foreign entity to work for a Chinese legal entity. A foreign national may also have a dual employment relationship, meaning that they may be employed both by the foreign entity and by the Chinese entity.

Different employment arrangements may entail different legal, tax and social insurance implications. For example, in a secondment arrangement, there will be no local Chinese labour contract. Instead, the foreign employer and the foreign employee will enter into a secondment agreement, and the foreign entity and the Chinese host will enter into a service agreement. However, such an arrangement may subject the foreign entity to potential Chinese taxes, as it may be considered providing service to the Chinese entity via the foreign employee. In both the direct employment and dual employment scenarios, a Chinese labour contract would be required. In addition, in all these scenarios, the foreign national will, in principle, need to participate in the Chinese social insurances (except in Shanghai where such participation is not a must for foreign nationals). A foreign national may be exempt from parts of the Chinese social insurance contributions if their home country has signed a treaty with China to avoid duplicated payment of social insurance premiums. However, China and the UK have not signed such a treaty yet, although Germany, Denmark, Finland, Switzerland, and the Netherlands have effective social insurance treaties with China.

Labour Laws in China: EmploymentEmployment in China is governed by strict labour laws - these differ considerably for Chinese and foreign nationals

Employee relations

Introduction

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3. Termination of Employment

Termination of an employment relationship in China is difficult as employers' unilateral termination can only be made in the limited statutory circumstances, following statuary procedures. This also applies to the Chinese employment relationship with foreigner nationals.

As such, it is necessary for an employer to carefully consider whether and how a termination should be implemented. As the burden of proof is on the employer in dismissal proceedings in a unilateral termination, the employer should be prepared to produce evidence and defend the termination in the labour arbitration or court proceedings.

In most cases of unilateral termination by the employer, a severance payment is due to the employee, even where the employment contract expires without renewal against the will of the employee.

Statutory severance payment would take into account the number of years an employee has worked for the employer and the employee's average monthly salary in the past 12 months. It is quite complicated when calculating the average salary, as there are many rules - including local legislation -regarding what constitutes salary and the capped amount for an average salary. The calculation of service years is also different for service periods carried out before and after 2008, due to the introduction of the Labour Contract Law.

In the case of an unlawful termination by the employer, there may be a requirement to pay compensation to the employee, or rescind the labour contract, by the labour arbitration tribunal or the court. As Chinese dispute resolution often favours employees and legal proceeding can be lengthy and costly, instead of taking unilateral termination actions, is often better for the employer to:

• Reach a mutual agreement with the employee to terminate the employment contract; or

• Encourage the employee to resign.

Mandatory clauses within an employment contract in China

Employee and

Employer information

Renumeration Responsibilities Working hours and

information on leave

Other specificationsEmployment period Social insurance Work related safety

Labour laws in China: Termination of employmentTermination of employment in China is complicated and costly and Chinese dispute resolution often favours employees

Employee relations

Raymond ZhuHead of China Desk Deloitte [email protected]

Raymond has over nine years of professional experience in banking and capital markets, he advices private and public sector financial service clients across UK, Europe and Asia on business strategy, risk regulations and advanced analytics. Raymond holds a MSc degree from the School of Mathematics, University of Edinburgh.

Raymond led the production of this guidebook, he brought together the information for this guide and applied his extensive financial service knowledge of both countries to set the content in context for UK FinTechs.

Yinfan ZhangDeputy Director, Financial & Professional ServicesDepartment for International in [email protected]

Based in the British Consulate-General Shanghai, Yinfan leads the UK Department for International’s fintech, capital markets and asset management team in China. Through governmental and regulatory dialogue, industrial working groups and trade missions, his team help UK financial and professional services firms to establish and expand their business in China. In the meantime they support Chinese financial institutions to establish their footprint in the UK.

Yinfan joined the Financial and Professional Services Directorate of UK Department for International Trade in March 2015.

Reach out to us for more information

Fang JiCounselDeloitte [email protected]

Lily has over 16 years of professional experience in advising multinational groups, state owned enterprises, domestic and overseas listed companies as well as private start-ups and growth companies on a wide variety of legal matters. Her practice areas include government services, foreign direct investment, outbound investments, private client services, comparable legal studies, etc.

Lily was admitted to the PRC Bar and the New York State Bar. She is also a PRC Certified Tax Agent. She holds an LL.M. from Columbia University, an LL.M. in taxation from the London School of Economics and an LL.B. from Peking University.

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