Beijing is wooing Internet-based financial services such as online peer-to-peer lending and crowd financing to move their activities to its technological hub, promising perks from lower rents to cash rewards.
Beijing's Haidian District, which administers Zhongguancun, known as China's Silicon Valley, has carved out three plots for Internet-based financial service companies as part of its effort to lead the nation's innovation drive.
The municipal authorities hope more such firms will make Zhongguancun their home after the district announced on Saturday a raft of measures to create a business-friendly environment.
"Haidian District's support is just a beginning. The city will provide continuous support for the development of Internet finance," said Li Shixiang, deputy mayor of Beijing.
The district's supportive policies include streamlined administrative procedures to encourage online financial services to register and operate there.
These companies will qualify for rent discounts if they set up offices in the three designated areas, located either within or near Zhongguancun.
Also, companies deemed to be making outstanding contributions to the Internet-based financial services industry will receive cash rewards of up to 50 percent of their tax contribution to the district during the first three years of operation.
Haidian will also provide a risk-hedging fund up to 4 million yuan (656,000 U.S. dollars) for online lending companies that extend credit to small and medium-sized firms.
The initiative also encourages traditional financial institutions such as banks and funds to offer their services online and build R&D centers for Internet financial innovation in the district.
The technology hub has a history of nurturing both big and small companies with entrepreneurial infrastructure from venture capital to incubators. The area is populated by leading Chinese tech firms such as Lenovo and Founder and international ones like Intel, Microsoft and Google.
The district now boasts 566 equity investment firms and nearly 100 Internet-based financial service companies. These institutions have raised 20 billion yuan for small and medium-sized firms.
Authorities hope to take advantage of Zhongguancun's existing entrepreneurial and innovative culture and crank it up a notch to welcome financial service providers that can help channel critical capital via the Internet to cash-strapped but promising start-ups.
Internet-based financial services such as online lending have quickly risen as an alternative for small and medium-sized companies to raise much-needed capital to keep their businesses going, as Chinese banks are more inclined to lend to large and state-owned enterprises (SOEs).
Li Mingshun, founder of Haodai.com, an online platform that matches banks and micro-loan providers with small firms, said his clients were mostly small players whose financing needs range from tens of thousands to several million yuan. They are often ignored by banks that focus on large-bill credit to SOEs.
"Companies on our platform are exposed to a wide range of financing sources such as banks and micro-loan firms, and we help them match with the lenders that best serve their needs," Li said, adding that his website processes several hundred million yuan in loan demand each day.
"Internet-based finance will be a game changer in how we tackle liquidity problems," said Luc Lan, CEO of Angel Crunch, an online crowd-financing platform that allows investors to fund start-ups and get company equities in return.
"The online finance sector is changing fast and we need to work out a way to help companies raise capital in a fair and sustainable way," Lan added.
According to a study by China Business News, China had 200 online peer-to-peer lending firms by the end of 2012. A total of 16 such lenders tracked in the study extended 10 billion yuan in loans in that year. The sector will likely see explosive growth in the coming years.
In a parallel development, more Chinese consumers are ditching brick-and-mortar retailers to shop at online stores. Online shopping transactions rose 66.5 percent from the previous year to 1.25 trillion yuan in 2012, accounting for 6 percent of total social retailing. Analysts predict online shopping will account for an even greater share of total consumer spending in the future.
The trend has also fueled the development of online payment services, another crucial segment of Internet-based finance. So far, China's central bank has issued third-party payment licenses to 250 companies. Statistics from the Payment and Clearing Association of China show that online-payment transactions in the country hit 6.89 trillion yuan last year and are likely to more than double in 2015.
A number of online retailers have waded into Internet-based finance. Chinese e-commerce giant Alibaba allows consumers to invest their spare cash into money market funds through its Alipay online payment service. The product, called Yu'ebao, or "Leftover Treasure," has netted 130 billion yuan so far, making the fund's management firm, Tianhong Fund, the country's largest fund management company.
China's Internet search giant Baidu has also announced that it will launch an online wealth management product with the Huaxia Fund Management Company before the end of this year, with an annualized return of 8 percent, higher than the 5-percent return of Alipay's Yu'ebao.
China's largest business-to-consumer online retailer Jing Dong (Formerly known as 360buy) has established micro-loan firms to provide financing for suppliers of the company's online shopping platform.
Analysts say such moves will fill in a territory that banks are not willing to enter, given their low risk tolerance for defaults and non-performing loans. Meanwhile, transparency over the Internet improves the efficiency of matching supply and demand for loans.
"China is never short of entrepreneurs, and we have a lot of spare money, but we have trouble bringing investors and cash-starved companies together," said Angel Crunch's Lan.
