China will reduce the risks of internet finance and peer-to-peer lending with steady progress as the shakeout in the nation’s $192 billion P2P lending industry accelerates at a rapid clip.
The latest moves of Chinese financial regulators include organizing industry investigations and urging leading internet platforms to undertake self-inspection to find and fix problems.
Internet lending platforms that comply with laws and regulations will be able to continue to operate while they finish a series of registration processes, the Office of the Leading Group for the Special Campaign against Internet Financial Risks and the Office of the Leading Group for the Special Campaign against Peer-to-peer Lending Risks said on Aug 4.
They will also guide unqualified P2P lending platforms in exiting the market and dealing with their assets and debts in a market-oriented way based on legal principles to protect the interests of investors.
Illegal internet lending platforms and borrowers with malicious defaults will be subject to strict punishment, Xinhua News Agency reported.
The new regulations are in response to the shakeout in China’s fiercely competitive peer-to-peer lending sector in the past few months.
A total of 253 platforms encountered problems in July and more than 100 platforms failed, according to P2P Eye, a web portal that tracks the industry.
The number of P2P firms had decreased to 1,968 by the end of July from a peak of more than 5,000 in 2014, after a two-year rectification campaign to curb illegal lending.
“The regulations are timely as the P2P lending industry is going through an elimination process with lower interest rates and tighter regulations on asset management products and services,” said Dong Dengxin, a finance professor at Wuhan University of Science and Technology.
“Although cleaning up the industry will be painful, it is good for the healthy development of the financial industry in the mid-and long-term.”
A China International Capital Corp report released in July estimated that no more than 200 firms, or about 10 percent of existing platforms, would still be around in three years.
Dong said Chinese regulators should pay attention to moral hazards－when transactions are not entered into in good faith－when hundreds of platforms fail and some P2P lending companies in good financial condition report they are failing in order to commit fraud.
Liu Yufei, a finance professor at Peking University, said regulators have carried out a series of measures starting in 2016 to clean up the industry, but there is no perfect way for the government to get rid of all the bad apples because there are so many lenders online.
Liu said while the government has the responsibility of cracking down on illegal activities and protecting the interests of investors, investors should also learn how to better manage their wealth.
“Investors should know higher return comes with high risk,” Liu said.
“As for platforms with misleading advertising, the punishment should be severe.”
The P2P platforms－which facilitate loans mostly from individual investors to borrowers willing to pay high rates of interest－have about 50 million registered users and 1.3 trillion yuan ($190 billion) in outstanding loans, which produced an average annual return of 10.2 percent in the first half of the year, according to Bloomberg.
Reported default rates vary from zero on the best platforms to 35 percent on the worst, according to the National Internet Finance Association of China.