China tightens regulation over P2P lending

Chinese authorities released a draft of new rules on Monday that tighten regulation of peer-to-peer (P2P) lending.

The rules were drafted by several government departments including the China Banking Regulatory Commission, which are soliciting public opinion on them until Jan. 27, 2016.

P2P lending, or lending done without a traditional financial intermediary such as a bank, has grown fast in China in the past few years, as investors seek higher returns than bank deposits while small businesses find it easier to secure funds through P2P platforms.

The new rules will impose 12 restrictions on P2P platforms, prohibiting them from taking in public deposits, pooling investors' money to fund their own projects, or providing any kind of guarantee for lenders.

"Those involved in illegal fund-raising and other unlawful activities under the disguise of P2P lending should be resolutely removed from the market," according to a statement.

P2P platforms should leave investors' money in the custody of banking institutions, according to the new rules.

Platforms are also required to set upper limits for the amount of loans a borrower can get in a single deal, and a borrower's total outstanding loans, in accordance with their risk management capability.

Many platforms have veered from their original function as brokerage between borrowers and lenders, providing guarantee for the lenders or pooling their money for other use instead, said the statement.

Some platform operators were suspected of making false advertising or illegally absorbing public deposits, while some made off with investors' money after business went sour, it noted.

There were 2,612 P2P platforms running normally across the country as of the end of November, brokering over 400 billion yuan (61.7 billion U.S. dollars) of loans in total. In addition, there were 1,000 non-performing P2P platforms, accounting for 30 percent of all P2P platforms.

"There are hidden dangers, such as credit risks and liquidity risks, that could affect the financial market order and social stability," the statement said.

P2P platforms typically offer yield rates above 10 percent for investors, while China's benchmark interest rate for one-year bank deposits stands at merely 1.5 percent now.

Regulators recognized the role of P2P lending in reducing the financing costs for small businesses and supporting innovation and entrepreneurship.

The rules will clean up the market environment and protect investors' interests.

After the rules take effect, P2P platforms will have a grace period of 18 months to rectify their business. Endi