China Regulators Watching Online Loans as Risks Multiply

By Bloomberg News  

Source: Imaginechina

A Chinese mobile phone user looks at information of Weicaifu, the wealth management... Read More

Rising failures in China’s peer-to-peer lending industry may pressure authorities to regulate a segment of Internet finance that almost quadrupled in size last year.
The number of platforms that went bankrupt or had difficulty repaying money climbed to 275 in 2014 from 76 a year earlier, according to Yingcan Group, which tracks China’s more than 1,500 online lending sites. Last month, police started investigating the originator of two Sina Corp. (SINA) wealth products for illegal fundraising.
The swift expansion of online peer-to-peer lending, which Yingcan estimates grew almost 300 percent to $17 billion last year, is part of a wave of financial innovation in China. For now, the government is leaving the industry largely unregulated, betting that the economic gains from extra
channels for funding outweigh the potential for investor losses.
“Regulators are in a dilemma,” said Xu Hongwei, chief executive officer of Shanghai-based Yingcan. “If they introduce regulations that are too harsh, it may lead to widespread failures of P2P websites. If regulations are too lenient, the government will be blamed when things go wrong.”
Peer-to-peer lending sites are online marketplaces that match investors with individuals and small businesses seeking loans for activities from stock investing to home and car purchases.

Photographer: Nelson Ching/Bloomberg

In a Nov. 26 speech, Pan Gongsheng, deputy governor of the People’s Bank of China, said... Read More

More than 1 million Chinese investors loaned money through these platforms last year, nearly four times the total in 2013, according to Yingcan. Outstanding credit surged to 103.6 billion yuan ($16.7 billion) from 26.8 billion yuan in 2013, the consultancy said in a report this month.

Small Fortune

Sina’s Weicaifu wealth unit is facing demands from more than 4,000 customers for the repayment of about 50 million yuan connected with two products issued by Zhonghuizaixian.com, Weicaifu spokeswoman Wu Jing said in a Jan. 6 e-mail. Her firm’s name means “Small Fortune” in English.
One of the products, called Yinghuibao, promised an annualized return of 7 percent, more than double the central bank’s 3.3 percent limit on bank deposit rates.
Zhonghuizaixian.com, based in Shenzhen, said Dec. 19 that it was cooperating with police on the illegal fundraising probe. While peer-to-peer sites can match lenders and borrowers, like all businesses in China they can’t raise deposits from the public and offer a fixed return unless they have a banking license.
In a second case, a peer-to-peer platform controlled by Beijing-based Internet company Sohu.com Inc. (SOHU) has pledged to bail out if necessary investors in a wealth-management product linked to troubled property developer Kaisa Group Holdings Ltd.

Market Forces

China’s government is fostering innovation to improve smaller companies’ access to funding and give market forces a greater role to sustain the growth of a slowing economy.
The launch this year of private banks -- Internet company Tencent Holdings Ltd.’s WeBank is among them -- is part of the process. The central bank is weighing the best timing for scrapping deposit-rate controls, the reform that it has described as the “riskiest” of planned financial changes.
“The appearance of P2Ps and other forms of Internet financing has improved the diversity of China’s financial products and that comes at little cost to traditional banks so far,” Lucy Feng, a China banking analyst at UBS Group AG, said at a Jan. 13 briefing in Shanghai. “Chinese banks will pay the price after interest-rate deregulation.”

Lower Costs

In a Nov. 26 speech, Pan Gongsheng, deputy governor of the People’s Bank of China, said Internet finance including peer-to-peer lending had helped to cut transaction costs and meet needs such as micro-financing and rural financing. Authorities needed time to “observe and learn” about Internet finance, he said at a forum in Beijing.
Pan said the PBOC was leading the effort to draft guidance, without giving a specific timeline. The central bank didn’t respond to a fax seeking comment on when rules would be introduced.
According to Yingcan’s Xu, the regulations should include stipulations to monitor the levels of registered capital for peer-to-peer sites, the experience of their managers and risk controls. Funds should also be supervised by a trustee and lending data should be submitted to the regulators on a regular basis, he said.
“The burning issue is to put some regulation and some boundaries in place as new investors including legitimate financial institutions are flooding into the business,” said Ivan Shi, a Shanghai-based analyst at investment consulting firm Z-Ben Advisors. “Risks in China’s shadow banking are already huge.”