Financial services in China have expanded rapidly in recent years, raising their share of GDP from under 5 percent in the first quarter of 2007 to over 9 percent in the first half of 2015. As a result of this rapid expansion, financial services accounted for fully one-third of the growth of the service sector in the first half of 2015. In the summer of 2015, as the Shanghai and Shenzhen stock markets melted down and trading volume collapsed, skeptics on China’s growth argued that the outsized contribution of financial services would wane. As a result, they argued, the relatively large contribution of service sector growth to China’s economic expansion would be undermined. So far this has not happened. In the third quarter of 2015 financial services continued to be the most rapidly growing component of value-added in the service sector, expanding by 16 percent.
This raises the question of what is included in the value-added measure of output of financial services. Is it overwhelmingly brokerage commissions, closely tied to stock trading volume, as some have argued? Unfortunately, disaggregated data on value-added in financial services is not published. But China’s fast-growing and innovative online finance sector is probably also contributing to the expansion of financial services. The penetration of smart phones in China is extremely high. Reports from emarketer and China Internet Network Information Center show that smartphone users in China reached nearly 600 million last year, accounting for 30 percent of the global number. And a large share of China’s population uses these as a platform for cashless transactions, insurance purchases, wealth management, bank transfer, loans and investments.
An examination of the classification system used by the National Bureau of Statistics shows that many transactions made via the internet, such as Alipay with its 400 million users, are included in financial services as opposed to other service categories. Financial services are composed by monetary financial services, capital market services, insurance and other financial services. Most categories of internet finance belong to other financial services, which includes nonfinancial institutional payment services and financial information services. The following chart shows most financial transactions carried out via the internet are included in finance in China’s GDP accounts, but some are included in retail or information technology services rather than finance.
Chart 1 Online Finance Transactions
Internet finance has been developing very rapidly and not just in the capital market services component. Fixed asset investment in other finance, which includes online payment services, went up by a quarter during the first ten months of last year, while FAI in capital market services declined by about 10 percent over the same span. Revenue from internet purchases of insurance increased 160 percent during the first half of 2015 compared to the same period of the previous year. In the first half of 2015 the number of subscribers of online payment services increased 23 percent, of which the number of mobile online payment rose 34 percent. Emarketer forecasts that the number of smart phone users in China will reach 700 million by 2018. Therefore, it is possible that internet finance unrelated with capital markets is expanding rapidly, contributing to the rapid growth of financial services even during the equity market slump in the third quarter.