China’s banking regulator has laid out planned restrictions on thousands of online peer-to-peer lenders. It has pledged to cleanse the market as failed platforms and suspected frauds highlight risks within a booming industry.
For more on this, joining us is my colleague Jin Yingqiao. Tell us more about the proposed rules, and how it will impact on the online peer-to-peer lending industry?
Jin: Well Zou Yue, the draft rule published by the China Banking Regulatory Commission will be the first for China’s booming P2P lending industry. The thrust of the commission’s approach is that the platforms are intermediaries, matchmakers between borrowers and lenders. Thus they should not themselves raise or lend money. Under the planned rule, online platforms shouldn’t take deposits from the public, pool investors’ money, or guarantee returns. It also rules out peer-to-peer sites distributing wealth-management products and limits their use for crowdfunding. While online lending has filled a serious void in providing access to capital, the lack of rules has created an industry that is suffering from rampant fraud.
Mr. Yang was a user of an online P2P financial platform a couple of months ago. But now, he is busy collecting information to sue the platform, which has disappeared after running for only three months. Like other victims, Mr. Yang has lost both of the returns and principle.
“At the beginning, the return was high. I can earn more than 100 yuan from 1000 yuan investment. After that, its normal annual rate was between 17 to 20 percent,” Mr. Yang said.
That was one of the most attractive factors for P2P financial users, high returns and low entry request. But on the dark side, some P2P financial platforms are not well managed. When the platforms cannot maintain their daily operation, most of them choose to just run away, with investors’ money.
“He told me that they had collaterals. But actually they pledged a house to many people,” Former P2P financial user Ms. Qi said.
“It happened overnight. The platform closed down,” Former P2P financial user Ms. Liu said.
Now, P2P financial is like a double-edged sword. It can provide one more option for small and micro companies in China to get capital easily, compared to banks. It can also offer a flexible investment channel for investors, especially with the current low deposit rates. But it is hard for investors to distinguish which ones are reliable and how long they can sustain healthy businesses.
“There is no rule for the whole industry right now. Some of them are not real p2p platforms and some are even illegal ones. Even if for the good ones, the fluctuation of credit risks can lead them to fail to pay as promised,” Zeng Gang, director of Banking research, Institute of Finance & Banking, CASS, said.
China had released a guideline for building healthy internet financing development in July. But analysts say before more detailed supervision rules become available, default and fraud risks will continue to grow in the industry.
Meanwhile, the new rules will require platforms to publicly disclose aggregate loan information and their performance. All peer-to-peer lenders will need to register with local financial authorities as a further step in improving transparency.