After the emergence of online financial services, different competitive elements have been introduced into China's financial industry. Compared with traditional banks, the new type of business model features two advantages:

First, when fighting for a market share with traditional banks, online financial services could strengthen the competitiveness of the entire industry.

Second, the new financial model is conducive to supporting small and medium-sized businesses. The outdated "market efficiency hypothesis" stresses that free-floating prices can optimize production and distribution, which has proven to be a great misunderstanding. From the 1950s to the 1970s, the interest rate was strictly controlled by the U.S. government; however, the country's real economy at that time was much better than that it was from the 1980s to 2008 when the interest rate was flexible. Prices are not everything, and fixed asset loans do not determine a company's future risk and opportunities.

In contrast, online financial service companies like Taobao.com possess huge amounts of trade information. By analyzing the big data, they can estimate the vitality of SMEs so as to determine their credit level and provide loans to them.

It will be not surprising if online financial services lead to a rise in legal lending rates. In fact, China's SMEs currently find it difficult to get loans from banks. Making the interest rates for small and medium-sized companies lower than for big enterprises cannot simply rely on the market mechanism, support from local governments is also crucially important.

As long as healthy competition can strengthen the market, lending rates in China will inevitably fall in the future. Currently, if China's central bank provides more support to the online industry, it will be helpful in breaking the monopoly of state-owned and multi-national banks, changing the "value preservation and appreciation of state-owned asset" model, and making employment promotion instead of short-term profits the key indicator when supervising and managing banks.

Any kind of innovation inevitably contains risks. Some companies are even not afraid to violate laws and rules in order to develop themselves rapidly, a fact which makes government supervision and regulation necessary. Financial regulation could effectively maintain the market order, but we have to think about how to implement regulation.

Previously, some economic experts believed that an efficient way to avoid financial risk was to increase the threshold for a company's registered capital. However, I don't think that the more registered capital a company has, the lower financial risk it will face. Real regulation should focus on a company's behavior, including the individual qualities and business experience of its top executives. In relation to this, I would like to make several points about online finance.

Firstly, as far as I can see, the constructive effects of online finance could outweigh the possible costs. It will change the current business model into a competition-driven one. If Alibaba's leaders could think more strategically, the company could change itself from a trade platform in the commodity market into a circulation platform in the financial market, with the capability to challenge the multinational financial giants. Online finance is an innovative test ground, which can promote the restructuring of China's banking industry, and promote the development of the country's real economy.

Secondly, online finance provides new space for China's SMEs to grow. Healthy competition can help to promote the survival of the fittest in the industry. Therefore, governments have to establish a suitable rule for financial regulation, which focuses on business behavior.

If China's financial innovation could both promote change in the current business model and the development of SMEs, then Chinese style financial innovation could rewrite history. In the new model, financial development and financial regulation could interact effectively and harmoniously, in contrast to the American model which lets the financial industry make money while society pays the bill.

The author is a former professor of National School of Development, Peking University.

This article was first published in Chinese and translated by Lin Liyao.

Opinion articles reflect the views of their authors, not necessarily those of China.org.cn.