Shangjin Wei (Columbia)
Dr. Shangjin Wei is N.T Wang Professor of Chinese Business and Economy, and Professor of Finance and Economics at Columbia University's Graduate School of Business and School of International and Public Affairs. Dr. Wei is a noted scholar on international finance, trade, and the Chinese economy. He was a recipient of the 2019 Contemporary Economics Prize, the Sun Yefang Prize for Distinguished Contributions to Economics, the Zhang Peigang Prize for Contributions to the Economics of Development, the Pushan Prize for Excellence in Research on the World Economy, the Ann Tse Kai Research Prize on International Trade, and the Gregory Chow Award for Best Research Paper.
Topic: FinTech as a Financial Liberator
Abstract: An artificially low interest rate on household savings is a common form of financial repression in developing economies and typically benefits incumbent banks. Using proprietary data from a leading Chinese FinTech company, we study the role of Fintech in ending the financial repression by introducing to households money market funds (MMFs) with deposit-like features. Cities and banks whose depositor base are more exposed to FinTech see greater deposit outflows. Importantly, banks respond to FinTech competition by offering their own products with market interest rates. FinTech thus facilitates a bottom-up interest rate liberalization.
On 10th August 2021, Professor Shang-jin Wei joined us in a Luohan Academy Webinar to discuss the role of Fintech in ending the financial repression by introducing to households money market funds (MMFs) with deposit-like features.
Financial repression that keeps the interest rate on household savings below the unconstrained value is a widespread phenomenon and a cause of underdevelopment (McKinnon et al. (1973), Shaw (1973)) in the developing world. In Professor Wei and his coauthors' paper, the FinTech competition induces the banks to raise the returns on household savings. The study by Professor Wei documents three findings that help us to understand the role of FinTech. First, PayTech combined with money market fund creates close substitutes for bank deposits. Second, more deposit outflows from cities and banks are more exposed to FinTech. Third, banks more exposed to FinTech competition are more likely to offer similar products. In addition, there is no evidence that banks became more engaged in risky lending activities.
The paper used three major data resources: the spread of Yu'ebao from Ant Group, penetration of Alipay from Ant Group, and information of Bao-type products from wind and banks. In the regression specification of empirical analysis, the outcome variables are cumulative fund flows into Yu'ebao and growth of deposit, while the main explanatory variable is Yu'ebao penetration as of December 2013. Importantly, in order to solve the endogeneity problem that adoption of Yu'ebao is caused by consumers wanting to exit banks and not the other way around, the paper introduces two instrumental variables - Alipay penetration before the launch of Yu'ebao and Distance to Hangzhou.
In the first-stage regression at the city level, a one percent increase in Alipay penetration leads to a significant 1.143 percent and 1.05 percent increase in Yu'ebao penetration with and without controls, respectively; one percent greater the distance from Hangzhou corresponds to a -0.579 percent and -0.352 percent lower Yu'ebao penetration for specifications with and without controls, respectively. In the second-stage regression, a one percent increase in the penetration of Yu'ebao can contribute to a 0.999 percent increase of city-level Yu'ebao MMF Fund inflows with controls. At the bank level, most results are robust except for the effects on deposits. The effects are significantly negative for bank-level household deposit growth but insignificant for bank-level firm deposit growth. After the initial level and mean reversion channel are controlled, a one percent increase in Yu'ebao exposure leads to a 7-9 percent decrease in household deposit growth.
To conclude, Professor Wei summarizes the findings of the paper. Firstly, there is strong competition for regulated bank deposits. More fund flows into FinTech in cities with higher FinTech penetration. The residential deposit growth is slower for banks with more exposure to Yu'ebao. Secondly, FinTech induces banks to offer market rates via T+0 retail products. Banks more exposed to FinTech are more likely to offer bao products. However, there is a significant negative impact on bank balance sheets. Lastly, FinTech is a financial liberator, effectively ending the financial repression of households.
Throughout Professor Wei's presentation, other participants including Professor Liyan Yang from the University of Toronto, and Luohan Academy economists Dr. Xijie Gao, Dr. Qi Sun, Dr.Yingju Ma, Dr. Jianye Yan ,and Dr. Qing Han, etc., discussed different sections of this research. For example, Professor Yang raised an important question about how to quantify the trade-off between the positive and negative effects of financial liberalization.
If you would like to participate, please contact our Economist Dr. Xijie Gao (firstname.lastname@example.org ).