The main objection is these funds do not come via established banks.
This creates a two-stream money market in which internet financial firms may bypass the rules for prudent lending.
New Online Lending Rules
The People’s Bank of China announced a new regime on Saturday, in terms of which internet online lending companies must have approval from both cyberspace and financial regulators, provide ‘sufficient disclosure’, and send risk reminders to clients. New loans for stock investment skyrocketed six times between January and May 2015, suggesting China stock is sitting on an inflated bubble.
Online lending firms now require a minimum amount of equity to enter the lending market (details pending) with the following regulations coming into place:
- The Central Bank will supervise online payments to ensure compliance
- The China Banking Regulatory Commission will oversee online lending
- The China Securities Regulatory Commission will handle equity crowd-funding
- The China Insurance Regulatory Commission will handle related matters
While some form of control over online lending in China is clearly necessary, it will be interesting to see how well these four regulators mesh.
Micro Online Lending Platforms under Threat
The new rules dictate that peer-to-peer platforms should remain within the concept, and desist from ‘raising funds illegally’ or ‘artificially enhancing borrower credit-worthiness’. The Yingcan Group has been tracing the fortunes of China’s online lending platforms, and estimates some 1,500 of these may go into liquidation, up from 275 in 2014.
Not everybody agrees with the new approach. As the secretary-general of the Finance and Industry Development Research Centre at Peking University Huang Song commented, “The government is trying to use a conventional approach to regulate this most unconventional business. Instead of encouraging the new online lending firms, they are just pushing existing financial institutions to embrace the internet.”