Crowdfunding in China

According to a recent World Bank report, China holds the greatest potential for crowdfunding’s future. By 2025, the PRC could account for more than half of the global crowdfunding volume potentially totalling up to USD 50 billion. Even though crowdfunding was non-existent in China before 2011, its exponential growth rates reflect this potential. In 2014, Chinese citizens had contributed a total of USD 436 million (RMB 2.82 billion) to domestic crowdfunding projects; this figure rose to USD 864 million (RMB 5.585 billion) in the first half of 2015. Particularly since China’s government has passed draft regulations on equity crowdfunding in December 2014, the number of Chinese crowdfunding platforms (CFPs) has been increasing, from 142 in 2014 to 235 by the end of June 2015. As the PRC’s crowdfunding industry is still quite young, and its growth rates are expected to rise even further, China could indeed become the largest crowdfunding market in the world in the near future.

New Institutional Economics can help explain why new institutions like crowdfunding arise. Irrespective of their constitution and status, institutions receive their legitimacy from the necessity to restrict and organise transactions and social behaviour. Characteristically, developed countries have stronger institutions and their citizens primarily rely on formal institutions. Although the Chinese government is promoting the formalisation of its institutions, per definition and as of today, the PRC is still a developing or at least a transition country. In particular, in terms of its financial sector, China is struggling to accelerate reforms. Indeed, the majority of its population still relies on informal finance as formal institutions do not meet their demand for finance. This work will argue that crowdfunding has the potential to bridge informal and formal financial institutions in China and eventually support the country’s move towards a developed country with strong institutions.

Crowdfunding originated as start-up finance, yet in the meantime has undergone some change. Moreover, crowdfunding in China differs substantially from the original (Western) concept. This difference not least can be seen from the various terms that describe different forms of crowdfunding. Whilst Western literature mainly distinguish between four types of crowdfunding—donations, rewards, debts (P2P) and equity, Chinese scholars clearly distinguish between P2P and crowdfunding. Within the latter, Chinese further distinguish between product-based (donations and rewards) and equity-based crowdfunding. This chapter provides a detailed analysis of the different forms of crowdfunding in the context of New Institutional Economics, it contrasts crowdfunding to classical financial intermediaries and finally explains the rational argument behind the choice for crowdfunding.

As formal finance cannot meet financial demand and informal finance is not the most favoured institution to fill this gap, the Chinese government has started to promote internet finance or FinTech. The latter has rapidly evolved in China, and in fact has the potential to challenge both, informal and formal finance. In order to understand crowdfunding’s embeddedness in China’s FinTech sector, this chapter starts with an overview of formal and informal finance and proceeds with an analysis of FinTech evolution in China. In addition, it draws a concise picture of China’s internet industry. In particular, it first illustrates the ecosystem of China’s internet giants, exemplified by the businesses of Alibaba and Tencent. Secondly, it depicts China’s mobile internet market. Thirdly, it explains the success and challenges of China’s e-commerce market, and fourthly, it analyses China’s payments market. Eventually, China’s shift from informal to internet finance will become more plausible.

China’s crowdfunding market differs a lot from the one in the West. Whilst some aspects of the original model have been adopted by Chinese actors—e.g. the idea of donation-based crowdfunding—other features have been amended or invented according to China specific needs—e.g. e-commerce crowdfunding. Moreover, whilst America and Europe provide many examples of typical start-up CFPs, which grew self-sufficiently and by means of commission, China’s crowdfunding market is dominated by established players and start-up CFPs with substantial capitalisation. Chinese crowdfunding is foremost affected by the country’s long history of informal finance and its advanced internet sector; therein, in particular, by China’s mobile internet sector, its e-commerce industry and also its payments sector. Moreover, the influence of cultural dimensions and specific Chinese habits, beliefs and values should not be underestimated. Ultimately, crowdfunding in China has become a hybrid of Western crowdfunding, China’s culture and Chinese capitalism.

Informal finance has been omnipresent in China for a long time and for certain reasons. Crowdfunding, in particular, the Chinese versions of crowdfunding provide true alternatives to informal finance and eventually could bring some change to China’s financial sector. However, the advantages and disadvantages of traditional informal finance (TIF) and crowdfunding respectively differ according to the actor in perspective. Therefore, this chapter deals with the stakeholders of TIF and crowdfunding—Chinese startups, the Chinese government, Chinese crowdfunders and Chinese crowdfunding platforms. This chapter considers the implications for each stakeholder, the benefits of TIF vs. CF for the respective actors and tries to evaluate under which circumstances crowdfunding for them could become a game changer of informal finance.

Crowdfunding is a recent but promising phenomenon as it provides an alternative financial tool with an integrated marketing function for people and organisations that lack access to traditional forms of finance. The global crowdfunding market is driven by China, though the country has a comparably short history of crowdfunding. In fact, the Chinese market provides unique prerequisites for a prosperous development of crowdfunding. First and foremost, it has an established informal finance sector as formal finance cannot meet overall financial demand. Therefore, Chinese are used to applying alternative financial tools. Secondly, China has an agile internet sector, driven by e-commerce giants and social media providers, which next to their core business also provide financial services like crowdfunding. As a consequence, banks and other traditional financial institutions have to face competition. Thirdly, the Chinese government welcomes and promotes this development as internet finance could become a motor for financial reform. This triad of an underdeveloped formal financial sector, an established informal finance sector, and a dynamic internet finance sector provides a unique setting for crowdfunding in China.