Caixin
Oct 14, 2016 06:39 PM
POLITICS & LAW

Central Government Releases Plans to Counter Fraud in Internet Financing

Photo: Visual China
Photo: Visual China

(Beijing) — China's State Council and the nation's financial regulators have issued a sweeping set of plans to tackle risk and outright fraud in the booming Internet financing industry, in which consumers have been swindled out of billions of yuan.

The Special Work Plan on Rectifying Internet Financial Risk was released by the State Council, China's cabinet. Other proposals were laid down by the central bank and both the banking and securities regulatory commissions. The plans include more detailed guidelines to increase supervision of the online financing industry, including peer-to-peer (P2P) lending, equity crowd-funding and third-party payments.

The China Banking Regulatory Commission will require local governments to comb through P2P lending platforms in their respective area to focus on identifying risks. High on the list are P2P lenders that set up capital pools by mixing client funds with different investment maturities, and making commitments to guarantee the principal and interest repayments on behalf of the borrowers in their advertising.

In addition, the plan also places emphasis on pinpointing online financing sites that grant loans to students, sometimes up to 50,000 yuan ($7,400) for those with an undergraduate degree, without inspecting their ability to repay their debts. The plan also blocks real estate enterprises from engaging in online financing businesses without a license.

Since 2012, the online lending sector has seen a dramatic surge as an accessible way to get loans for individuals and small and midsize companies who are often ignored by banks, which usually favor state-owned enterprises.

But online finance has been dogged by failure and fraud. More than 1,000 online lending platforms were forced to shut down in 2015 after they ran out of cash. About 670 were closed because managers absconded with client funds; one company embezzled 4.6 billion yuan, according to Wangdaizhijia, a Chinese research firm that tracks the P2P industry.

The plan will play "a significant role in preventing the spread of risks, and averting the industry from leaning away from the correct track," according to a question-and-answer statement on the banking regulator's website.

It said the sector had turned out to be "a shelter for violations such as illegal fund-raising," and that there was a "hidden danger of triggering regional systematic financial risks that could disrupt the normal economic and financial order."

"Due to the absence of decent regulation, P2P has seen unrestrained growth, especially in 2013, and some platforms were wooing investors with promises of high return rates of up to 10 to 20 percent without disclosing detailed information," said Ma Jun, chief analyst with the Wangdaizhijia research firm.

In addition to the P2P industry, the authorities also laid out rules to revamp other online financing platforms. This includes barring equity crowd-funding platforms from claiming to make an equity investment when in fact it is essentially a bond investment.

Meanwhile, commercial banks should not make interest payments to third-party payment firms' settlement accounts. That's a move to prevent the firms from holding the funds in order to collect interest instead of quickly delivering the money to clients.

According to the document issued by State Council, regulators have been inspecting the P2P industry for some time, and they are scheduled to be done by next month. The central bank will submit an overall report on its investigation of the internet finance sector and offer a supervision proposal to the State Council by the end of March.

"In fact, the local governments have generally completed the initial inspection, and the newly issued plans are aimed to stress again the significance of the crackdown in fear of any fish that have escaped the net, and the central government needs to yield a proposal to present in the next year's congress conference," Ma said.

Contact reporter Dong Tongjian (tongjiandong@caixin.com); editor Ken Howe (kennethhowe@caixin.com)

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