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August 25, 2016

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CBRC acts to control US$93b P2P sector as 50% of sites face woes

CHINA’S banking regulator unveiled aggressive measures to restrain the country’s fast expanding peer-to-peer lending sector yesterday, warning that almost half of the 2,000-odd online lending platforms are “problematic”.

The US$93 billion P2P lending sector has been a source of funds for individuals and small businesses overlooked by the country’s traditional financial services institutions that prefer big borrowers with better credit history and collateral.

But China’s approach to promote the sector as a form of financial innovation has led to a rash of high-profile P2P failures, scandals and frauds.

Some P2P firms are running Ponzi schemes and raising funds illegally, said the China Banking Regulatory Commission, which jointly released a new set of regulations with three other government bodies to tame the unruly sector.

Under the new rules, an individual can borrow up to a maximum of 200,000 yuan (US$30,072) from each P2P platform, with a maximum of 1 million yuan, the China Banking Regulatory Commission said yesterday.

Corporate borrowers face a ceiling of 1 million yuan from each P2P site and a limit of 5 million yuan.

The new rules bar online lending platforms from taking public deposits or selling wealth-management products. They also require P2P sites to appoint eligible banks as custodians and improve their information disclosure, the CBRC said.

The regulations also ban P2P firms from providing guarantees for investment principal or returns, a common marketing practice to lure funds from unsophisticated retail investors.

The new rules reflect the CBRC’s concerns of fraud and financial risks among China’s 2,349 online lenders as of end-June because nearly half of them face problems, according to Online Lending House, a portal site that tracks the sector.

The remaining firms had total outstanding loans of 621.26 billion yuan (US$93.43 billion).

The regulations, issued by the CBRC, the Ministry of Public Security, the Cyberspace Administration of China, and the Ministry of Industry and Information Technology, follow the passage of a plan by the State Council, or Cabinet, four months ago to launch a campaign to clean up the online finance sector.

New companies with Internet-finance related names are banned from registration in Beijing, Shanghai and Guangzhou.

“The campaign will continue until the end of this year and the detailed rules on the P2P sector could help to underpin the campaign,” said Xu Duoqi, associate professor at Shanghai Jiaotong University Law School, told Shanghai Daily.

“But how the rules will come next will largely depend on how serious are the hidden risks and how big the pressure government is facing amid a cooling economy.”

In February Chinese police arrested 21 people involved in running P2P lender Ezubao in an online Ponzi scheme that duped aboout 900,000 investors to part with around 50 billion yuan (US$7.6 billion), according to the official Xinhua news agency.

The Ezubao case has highlighted the risks in China’s fast-growing US$2.6 trillion wealth management product industry, whose products are sold via loosely regulated channels such as online financial investment platforms.

After eight years of operating without clear rules, China’s P2P industry extended 982 billion yuan in loans in 2015, almost quadruple the amount in 2014 and a 10-fold jump from 2013, according to data compiled by Online Lending House.

“At the end of the day, the nature of P2P platform is the same as banks,” said Xu Hongwei, president of P2P research firm Yingcan Group, adding that more detailed rules to clarify the situation in the industry should be welcomed.

James Zheng, chief financial officer at Lufax, the No.1 P2P lending platform in China, said at a conference in Hong Kong that the industry “is going through consolidation right now and the regulator is cracking down on Ponzi scheme players. The 3,000 P2P companies probably will be consolidated into 200-300 by this time next year.”


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