A guideline regulating financing activities on the Internet has been issued by China’s central bank and government departments.
The guideline, issued on July 18, encourages innovation in Internet finance while setting out measures to ward off potential risks.
Internet finance, which has developed rapidly in China, now covers a range of areas including online payment services, loans, insurance, trust and consumer finance, and equity-based crowdfunding.
Crowdfunding refers to financing a project or venture by raising monetary contributions from a large number of people, typically through the Internet.
The guideline sets out different regulatory responsibilities for each financial regulator.
The People’s Bank of China, the central bank, will supervise online payments, while the China Banking Regulatory Commission will be in charge of regulating Internet loans, trust funds and consumer finance.
Equity-based crowdfunding comes under the China Securities Regulatory Commission, and online insurance sales regulation will be handled by the China Insurance Regulatory Commission. Controversial peer-to-peer lending will be under the supervision of the banking watchdog, according to the guideline.
It also states that all online financing platforms should entrust commercial banks to manage their clients’ capital.
More specific rules will be released later by the different regulators, according to a statement on the central bank’s website.
Over the past two years, the Internet has increasingly become a new channel connecting investors with lenders that have been underserved by Chinese banks.
It has also become a popular sales channel for a wide range of wealth management products, from money market funds to borrowing cash and investing in the stock market. The rapid growth of Internet finance has had watchdogs on the prowl.
On one hand, policymakers are willing to accelerate development of finance based on the Internet and telecommunication technology as part of the “Internet Plus” plan, aimed at better supporting real economic growth.
On the other, the less-regulated Internet financial products have led to risks in the entire financial system, with more online financing platforms reporting defaults and even fraud, requiring tightened regulation of the sector.
On July 12, the China Securities Regulatory Commission said it would stop online sites from handing out loans for stock purchases after the recent market turbulence led to the benchmark index plunging by more than 30 percent.
Li Mingshun, chief executive officer of Haodai.com, a peer-to-peer lending platform, said the regulatory framework will encourage the emergence of new business models, especially for micro-and small financing.
“A clear guideline on regulation can reduce speculation in the sector and curb vicious competition among Internet financing companies,” he said.
Huang Zhen, a professor at Central University of Finance and Economics, expects the government to release detailed regulations soon.
“It is also important to strengthen cooperation between different regulators, to avoid a tradition of passing the buck,” Huang added.