China P2P Lending

The Chinese government has drafted rules to limit P2P lending in an effort to clean up the online financial sector. China’s central bank has drafted a plan following a video conference organized by the State Council, the cabinet, in mid-April with 14 regulators and ministries. The State Council approved the plan.

The plan, viewed by Reuters, establishes stricter rules for P2P platforms. P2P lending quadrupled to 440 billion yuan ($67 billion) last year, according to Citigroup research. The rules prohibit lenders from holding clients’ capital in-house. Funds must be deposited with an approved third-party banking institution, and the funds have to stay separate from a P2P platform’s corporate funds. The companies must also establish “firewalls” for managing transactions with affiliates.

P2P Sector Supports Regulation

Wang Zhijian, CEO of FuYin, a P2P platform based in Shanghai, said the online finance sector has faced a difficult period this year, speaking at a financial forum on Friday.

Wang noted that good platforms support government regulation since without good rules, bad players remove good players. He said insufficient regulations have forced unfair competition on all players.

Police in February arrested 21 officials in Ezubao, the country’s largest P2P lending platform at one time, which collected $7.6 billion in two years from over 900,000 investors. The platform used savvy marketing to fund a Ponzi scheme that used investor funds that went to company executives, authorities said.

In another case Reuters reported, police arrested 21 people in April with ties to Zhongjin Capital Management, a well-known Shanghai investment firm, for illegal fundraising. The police identified one person arrested, Zu Qin, an executive of Guotai Investment Holdings Co., Zhongjin’s parent company.

One employee of the company said she feared losing 1 million yuan ($154,595) that she invested with the company.

Fraud Expands In China

Fraud and default cases have grown in recent years as the economy has slowed, and companies have had to pay higher interest rates.

The Shanghai arrests came two days after the municipal government began a crackdown against illegal fund raising.

Wang Sicong, chairman of P2P platform eLoan, said the big cases are neither online or P2P. Instead, they are frauds operating in the name of online finance and P2P. He said eLoan’s business fell by a third following the exposure of the Ezubao fraud.

Internet lending has expanded beyond China. The U.S. Department of Justice investigated Club Corp (LC.N) in San Francisco, Calif., which admitted falsifying documents in selling a loan package.

China’s cabinet urged the 14 ministries to work together and share information in addressing the online finance sector.

The government also wants to establish a unified platform for Internet bank accounts and a centralized registration system for Internet financial products.

Also read: $7.6 billion scam flames out in China

Plan Restricts Online Platforms

The plan restricts online platform activities that are not licensed. It restricts activities like raising cash to fund real estate projects and engaging in financial services like asset management. It also creates added responsibilities like a requirement to match client risk profiles to the investment products sold.

The plan forbids non-financial firms from registering names that include “asset management,” “payments,” “finance,” “P2P,” “trade exchange” and “fund.” It forbids false advertising financial products.

The government is also establishing an inter-government entity to be led by the central bank. This entity will have representatives including securities, banking and insurance regulators, as well as the Ministry of Housing and Urban-Rural Development and the State Administration for Industry and Commerce.

The ministries and departments are expected to complete field investigations by July and a sector-wide clean-up by November. The cabinet plans to release a report next March.

The State Council and central bank did not respond to requests for comment.

China’s central bank is exploring ways to collect and distribute data concerning how funds are raised online on account of the risks online finance poses, according to Sheng Song, director of the statistics department.

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