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August 10, 2015

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Home » Business » Finance Special

Peer-to-peer lending also comes under the regulatory thumb

Two days after the central bank imposed strict new rules on the booming Internet finance industry, peer-to-peer lender CreditEase took out a front-page advertisement in People’s Daily to assure consumers that it won’t be going out of business.

Not every player in the market is that confident, however.

More than 2,000 online lenders now face sweeping changes in the aftermath of the July 18 guidelines. Industry insiders said up to 90 percent may need to dramatically change their business models or shut down altogether.

“It’s the biggest ever reshuffle of the industry,” said Xu Hongwei, chief executive officer of the Shanghai-based Yingcan Group, which tracks China’s peer-to-peer lenders.

Under the People’s Bank of China’s new guidelines, finance platforms will be limited to roles as intermediaries between lenders and borrowers. The regulations ban online sites from raising funds of their own to lend out. The China Banking Regulatory Commission has been charged with overseeing the sector.

“Some online platforms will need to stop their recent practice of extending loans,” said Xu. “Others will have to change their business models to, say, improve disclosure and appoint banks as custodians.”

The so-called P2P industry is booming in China. Lending transaction via the Internet rose to a record 82.5 billion yuan (US$13.3 billion) in July, with total lending surging almost 13-fold since 2012 to 766 billion yuan, according to Online Lending House, a portal site that tracks the sector.

Borrowers are drawn to such sites because they can get easier access to loans without going through the traditional banking system, and lenders participate because they can charge higher interest rates.

Leading services like CreditEase or said they view the new guidelines as a positive sign, contending they may help weed out scammer and other dubious players.

But other experts and insiders warned that the regulations, if implemented too rashly, might effectively choke off an innovative segment of the booming Internet finance industry.

“The detailed draft of the regulations remains to be seen and may be a long way off,” said Wang Zhengyu, founder and chief executive officer of China Rapid Finance.

He said he worries that thresholds for initial funding capital or capital adequacy ratios imposed on the industry may be too strict.

“P2P platforms need full information disclosure to remain healthy,” Wang said. “But it’s dangerous to regulate them like banks.”

Guo Yuhang, founder and co-CEO of P2P platform, echoed that view. He calls for a whole new style of regulation based on information exchange instead of the rigid rules imposed on traditional financial institutions.

“Using technology as a regulatory tool is the mode of the future,” Guo said. “Regulators could ask all P2P platforms to open their background databases for monitoring and punish the problematic ones by publishing their names.

Dysfunctional market

Xu Duoqi, professor and executive director of the Finance Law and Policy Center at Shanghai Jiao Tong University, said regulation is important but it can create a dysfunctional market.

“It’s more important to rely on market competition to inspire self-risk control and business innovation,” she said.

After all, the new rules are a boon for Chinese banks, which have seen some of their business eroded by the online lending craze. Some may even acquire P2P platforms as a part of their wealth management operations, Li Shanshan, an analyst at Bank of Communications International Holdings, said in a recent note.

“How strict are the detailed rules going to be depends on how competitive is P2P platforms towards banks,” Xu Hongwei said, “Once the turnover of the industry surpassed certain line, while banks fasten their pace losing savings and profit rate, rules will become more choking for players to survive. ”

Even facing a tightening environment, the growing momentum of P2P industry doesn’t show any hesitation. Online Lending House foresees the total transaction of the P2P industry to reach 1 trillion yuan by the end of 2015, and at least 50 percent of China’s listed major enterprises would establish their own P2P channels to distribute loans to related chain companies.

“Regulation brings the industry to the battle field. The most dazzling seesaw game is just about to start,” Yingcan’s Xu predicted.


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