INTERNET finance is thriving in China, where an absence of strict regulatory controls makes it unique in the world in terms of the scale of online lending, wealth management, payments and money transfers.

Among the most rapidly growing online tools involves microfinance. Peer-to-peer financing took off in 2012 by bypassing banks and providing platforms that match borrowers and lenders in small loan transactions ranging from few thousand yuan to 1 million yuan (US$162,224).

The whole scope of Internet finance in China is a phenomenon rarely seen in foreign countries, according to Chen Yu, industry partner of Internet finance at Harmonia Capital.

Chen, writing under the pseudonym “Young Cynic in Jiangnan,” attracted considerable online attention after publishing a series of articles on Internet finance on his blog.

He said in the US, about 80 percent of the Internet finance firms he visited are Internet companies, while the remaining 20 percent are financial firms.

A comparable list for China goes well beyond that. Those offering some form of financial services include retailers like Suning and JD.com, online travel agency Ctrip.com, Dazhong Transportation Group, search group Rong360 and Panda Fireworks Group.

“Internet finance in China breaks through financial regulations, which could hardly be understood or accepted in the US,” Chen wrote in his recently published new book on the topic.

In sharp contrast to the Chinese government’s laissez-faire attitude toward Internet finance, New York cracked down on illegal online lending firms in last June. A series crackdown here looks unlikely.

Tu Guangshao, executive deputy mayor of Shanghai, said last month that the government supports the development of Internet finance to provide basic services to a wider proportion of people, especially low-income groups.

“Internet finance should be a significant part of an inclusive financial system,” Tu said. “Use of the Internet will greatly improve information transparency and thus bring down costs.”

Peer-to-peer lending is a market particularly ripe for rapid growth because it provides an alternative to banks burdened by higher operational costs, regulatory capital requirements and profit-draining interest rate deregulation.

The number of peer-to-peer lending companies since 2012 almost septupled to 714 in April this year. Online peer-to-peer sites facilitated 110 billion yuan in loans in 2013, according to ZeroOne Data, a monitoring and analytics platform for Internet finance.

By contrast, the comparable online lending framework in the UK extended 500 million pounds (US$846.5 million) of loans to consumers and small firms during the first half of 2014. It’s expected to double to 1 billion pounds by the year’s end, which will be equal to only 9.5 percent of China’s volume in 2013, according to a London-based industry group called P2P Finance Association.

The same sector in the US experienced a 176 percent surge in lending in 2013 to US$2.4 billion. That was equal to 13.5 percent of China’s figure.

“The Chinese peer-to-peer market far exceeds that of the US,” Dong Qi, founding partner of Puhui Finance, told Shanghai Daily. “In the US, community banks have done well in microfinance, and the credit rating system is far more advanced than here.”

Chinese peer-to-peer companies are expected to grow much bigger than top companies in the US, such as Lending Club and Prosper, he said.

Experian Plc, the global information and analytical tool provider for credit risk management, especially for credit card debt and consumer loans, launched a credit rating system with Chinese partner Puhui Finance last month.

More partnerships

Chris Yao, chief executive officer at Experian for China, said the company will be very active in the sector and is currently in discussion with some major e-commerce and Internet finance companies for more potential partnerships in China.

Between November 2013 and April 2014, six online peer-to-peer platforms have received equity investments valued at more than US$200 million. Japan’s SoftBank Corp, one of the foreign investors, allocated at least US$10 million to Yooli.com. Dong at Puhui said he expects more capital to be invested in the sector in the next two years.

But the industry is no bed of roses. China’s peer-to-peer lending has experienced a number of collapses and cash withdrawal difficulties of late.

Twenty companies went bankrupt in 2012, and 70 platforms closed in 2013, according to ZeroOne Data.

Last month, Deng Liang, founding partner of online peer-to-peer platform Eastern Investment, was sentenced to three years in prison with a three-year probation.

A court in Shenzhen found him guilty of running a Ponzi scheme that used the funds of current lenders to pay off former lenders. The scam afforded Deng an extravagant lifestyle.

“Customers are most concerned if adequate risk controls aren’t in place,” said Enzo Liu, a salesperson at a peer-to-peer company in Shanghai. “Of course, some of them fall victim to ‘black sheep.’ The reality is that every industry has a mixture of the good and the bad.”

Liu recently jumped ship after speculative reports on the bad loans of his previous company. He now works for a smaller company and has managed to keep some of his former loyal customers because of his reputation for trustworthiness.

Yan Qingmin, vice chairman of the China Banking Regulatory Commission, said earlier that new rules will soon be announced to guide peer-to-peer lending. They will be aimed especially at preventing the establishment of capital pools by companies.

According to sources, the State Council, China’s cabinet, has asked financial regulators to draft guidelines for Internet finance, which were expected to be released before year’s end and serve as a comprehensive framework for the entire sector.

However, the timetable may be in doubt. Regulators view peer-to-peer lending as “social financing” and are reluctant to impose the same kinds of standards as exist for banks. Even if the new rules are announced, they will just be guidelines with administrative restrictions but no legal constraints.