By Zolzaya Erdenebileg

Crowdfunding, funding a project through online donations, has become a popular way to invest in the West; but in China, it’s a relatively nascent industry with enormous potential for future growth. The World Bank’s 2013 Crowdfunding’s Potential for the Developing World report estimated that China will generate $50 billion, or 52 percent of the global total, in crowdfunding by 2025. During 2015, RMB11.4 billion ($1.7 billion) was raised through crowdfunding platforms in China – an over 400 percent increase from 2014.

By the end of 2015, 283 crowdfunding platforms hosted 49,242 projects in China. The majority of these projects – 69 percent – were reward-based crowdfunding, where participants were given incentives in return for donations. The remaining projects were divided between charity crowdfunding and equity crowdfunding, where participants were given equity shares in return for donations.

Market conditions

Crowdfunding first appeared in the Chinese market in July 2011, with the debut of Demohour, a platform primarily serving creative fields such as design, film and video, music, and publishing. At present, Demohour is one of the largest crowdfunding platforms in China. However, its focus on creative fields makes it difficult to compare with the traditional reward and equity crowdfunding platforms. Even Demohour’s founder and chief executive Chang Yu considers the company to be more of an online presale retailer, more akin to Groupon than Kickstarter.

In fact, many crowdfunding platforms in China have specialized focuses. For example, Dreamore raises funds for art, culture, and public welfare projects; Musikid serves as a platform for music-related projects; and Tao Meng funds amateur filmmakers and can recruit crew for proposed projects.

Additionally, Chinese crowdfunding platforms offer tangible rewards for their contributors more often than their western counterparts. Frequently, a campaign will offer physical goods like coupons, souvenirs, books, or DVDs in return for the contributions, which Chang attributes this to a difference in culture..

More conventional types of crowdfunding also exist in China. AngelCrunch, which functions as an AngelList for Chinese companies, was one of the first and biggest equity crowdfunding platforms in China. The platform has 8,000 registered entrepreneurship projects, more than 1,000 listed companies, and over 22,000 members. Other well-known equity sites include Dajiatou, Yuanshihui, Renrentou, ihetou, and Yunchou.

Top players

Crowdfunding will experience numerous changes as bigger companies foray into the industry. In December 2013, Aliababa launched crowdfunding on Taobao, creating Yulebao, which allows investors to support Chinese films. The site allows participants to invest small amounts, between RMB100 and RMB1,000, in domestically-produced films, and was involved in funding popular projects like “Wolf Totem” and “Tiny Times.”

In July 2014, JD.com, one of China’s largest e-commerce websites, launched Coufenzi, a crowdfunding platform hosting a variety of projects. Shortly after, in 2015, JD.com launched JD Equity Crowdfunding, a platform devoted to entrepreneurs looking for early-stage investors. Baidu and Tencent also entered the market by launching Baidu Crowdfunding and Tencent Succor, also known as Tengxun Lejuan.

Market potential

Recently, the prevalence of smartphone usage in China spurred many new entries into the market. There are 650 million internet users in China, and 86 percent of internet usage is through smartphones. Furthermore, the use of electronic money is on the rise; Alipay consists of 350 million users, with WeChat Wallet, Baidu Wallet, and many others vying for market share.

There is also a need for crowdfunding from the supply side. Chinese investors are actively on the hunt for attractive investment projects to place their money – about US$4.6 trillion worth. At the same time, startups and entrepreneurs have difficulties accessing loans, both from commercial banks and institutional investors, and a low percentage of all bank loans are directed towards them.

Regulating the market

Despite positive momentum, allegations of fraud rocked China’s crowdfunding market. One example is Ezubao, an online finance company that offered fake investment products to nearly one million investors; pilfered over $7.6 billion; and in late 2015, was investigated, shut down, and discredited by local officials as a large Ponzi scheme. Cases like Ezubao highlight the need for oversight, but industry regulations have been slow to be approved and implemented.

In December 2014, the Securities Association of China (SAC) issued the first draft regulations for equity crowdfunding, including clear rules for platforms, investors, and companies. The draft regulations require investors to be accredited, meaning that anyone who wants to invest in equity crowdfunding projects must meet at least one of the following requirements:

  • Invest at least RMB 1 million in a single project;
  • Possess net assets of RMB 10 million; or
  • Possess financial assets of RMB 3 million and having an annual income of at least RMB 500,000 for the past five years.

The draft is still under discussion, but it demonstrates the confused regulatory state of the industry – the government wants to support it, but may pass laws restricting it and thus, stunt its growth.

More recently, in July 2015, China’s central bank and several other relevant government departments issued guideline to regulate the general online finance industry. In August 2015, the China Securities Regulatory Commission (CSRC), the supervising government body for crowdfunding, announced that it would begin inspecting online equity financing platforms and assessing any possible illegal activities. In December 2015, the China Banking Regulatory Commission (CBRC) issued the first draft for online lending, and in August 2016, announced the first official rules. This development indicates that crowdfunding will soon be subject to more specific regulatory requirements.

 

About Us
Asia Briefing Ltd. is a subsidiary of Dezan Shira & Associates. Dezan Shira is a specialist foreign direct investment practice, providing corporate establishment, business advisory, tax advisory and compliance, accounting, payroll, due diligence and financial review services to multinationals investing in China, Hong Kong, India, Vietnam, Singapore and the rest of ASEAN. For further information, please email [email protected] or visit www.dezshira.com.

Posted by Zolzaya Erdenebileg