News Analysis: Internet finance guidelines pave way for healthy sector

Financial authorities hope new guidelines for China's burgeoning online finance market can end the sector's wild growth and foster a healthy market through closer supervision and support for innovation.

Issued by 10 central government ministries, including the central bank, the guidelines propose measures to cope with risks in the industry, such as a mechanism for improved transparency, and a public education campaign on online banking.

The guidelines categorize online banking into different business sectors and place each sector under the supervision of a specific institution.

The central bank will oversee online payments while the China Banking Regulatory Commission will supervise online lending and peer-to-peer platforms. The China Securities Regulatory Commission will be responsible for crowdfunding and the online sale of funds.

"China has seen rapid development in Internet finance, but some problems and hidden risks have also cropped up. The release of the guidelines showed the government has been well aware of that and is determined to address the problems," said Guo Tianyong, a professor at Beijing's Central University of Finance and Economics.

He said the guidelines are an important step in implementing China's "Internet plus" strategy aimed at using cyberspace to foster new ideas and growth in the economy, plus regulating the exploding market.

Internet finance has played a positive role in helping small enterprises grow and expanding employment, opening the doors for mass entrepreneurship and innovation.

However, risks such as fraud, fund flight, illegal fundraising and an imperfect credit system have emerged.

The turnover of Chinese peer-to-peer (P2P) lending platforms, loans made without going through traditional financial institutions such as banks, reached 321.19 billion yuan (53.76 billion U.S. dollars) in 2014, up 268.83 percent year on year, according to the Payment & Clearing Association of China.

Its report also showed that 287 P2P platforms either went bankrupt or had difficulty in withdrawing funds as a result of fraud in 2014. This was an increase of 282.67 percent from the previous year.

The guidelines should decrease the negative effects of illegal network transactions, protect the legitimate rights of investors and encourage fair competition, according to Guo.

They specify that client funds must be parked at established banks, and require that online financing platforms provide better disclosure and warn customers more regularly about risk.p In addition, the guidelines also outline measures to encourage innovation in Internet finance, including boosting cooperation between financial institutions and Internet companies, expanding access to capital, cutting red tape and introducing tax breaks.

According to the guideline, the government will broaden channels for fundraising for Internet finance firms and will encourage those they deem qualified to list on domestic markets.

Zhang Jun, CEO of Internet finance ppdai.com, said the guidelines provide a legal groundwork for the P2P lending sector and will benefit the industry as it develops.

"It will also kick out unqualified P2P platforms and reshape the market," said Zhang.

In the long run, the guidelines will need to be adapted to the changing environment of Internet finance, with companies being the key player in Internet finance while government is the supervisor, said Guo. Endi