New P2P rules curb risky online lending

China, with 700 million internet users, is the world’s fastest-growing market for internet finance. The industry boom has led to perceptions that the evolution of peer-to-peer (P2P) lending in the country has been too rapid and disorderly, creating a convoluted mechanism that has deviated from its original track of providing convenient financing means where, in its purest form, one individual simply lends money to another. Such criticism was largely fueled by the lack of focused regulatory policies and legally defined limits on the industry’s activities.

Official data from the China Banking Regulatory Commission (CBRC) show that, at the end of June this year, 40% of the total 4,127 P2P lending platforms were suffering from operational problems, meaning repayments had ceased, they had been investigated by the police, or the operators simply ran away with investor funds—the most famous case being the alleged Ponzi scheme, Ezubo, which involved more than Rmb50 billion ($7.6 billion) in fraud and over 900,000 affected investors. Meanwhile, outstanding loans issued by P2P platforms in “normal” condition reached Rmb621.3 billion ($93.6 billion) in mid-2016. This is in contrast to 2012, when only 50 financing platforms were in the market, loaning out a total of Rmb3.1 billion to 28,000 borrowers, according to the McKinsey Global Institute.

New regulations, aimed at returning these companies to their core business, preventing financial risks and protecting investors’ interests, were issued this year. They set strict operational and establishment restrictions on P2P online lending platforms, confine them to private lending businesses and define their scope of liability.

P2P online lending was first classified as “internet finance” and as a form of private lending in the Guiding Opinions on Promoting the Healthy Development of Internet Finance (Guiding Opinions) issued in July 2015 by the People’s Bank of China and nine other departments, including the CBRC. The Guiding Opinions empowered the CBRC as the supervising authority of internet lending and for the first time, defined the nature of the sector as an “intermediary platform”.

The CBRC, along with the Ministry of Industry and Information Technology, Ministry of Public Security and Cyberspace Administration of China, then released the Tentative Measures for the Administration of the Business Activities of Peer-to-peer Lending Information Intermediaries (Tentative Measures) on August 17, 2016, which clarified a number of key issues faced by the P2P lending industry such as business scope, industry position, regulatory model, operational guidelines and risk prevention measures. Supporting documents and regulations to facilitate the implementation of these rules are expected to follow, including, for example, the financial filing and bank depository regulations for funds of online lending customers.

Popular P2P online lending operators today include Paipaidai (ppdai.com), which had 1.2 million registered members in 2015 and a total transaction volume of over Rmb1.4 billion by mid-2014, and Dianrong.com, through which personal loans range on average between Rmb50,000 and Rmb150,000 while loans to small and medium-sized enterprises (SMEs) average Rmb1 million to Rmb2 million. Beijing-based Jimubox.com had accrued half a million users in less than a year after it started lending in 2013, and Renrendai.com had 1 million users at the end of 2014, data from the Association of Chartered Certified Accountants show.