News Analysis: Tighter regulation to clean Chinese e-finance

Chinese financial regulators are hoping a crackdown on illegal fundraising can clean up the country's burgeoning e-finance industry after a rise in fraud.

In the second half of this year, an interagency task force formed from 14 government departments will scrutinize fundraising activities in key fields including online lending, private wealth management, rural cooperatives and private equity.

In Internet finance, authorities will tighten their monitoring of online fund flows, increase rewards for informants on illegal activity, and establish risk identification and alert systems.

The move, announced on Wednesday, came in light of illegal fundraising tarnishing the image of e-finance.

The number of new cases of such crime jumped 71 percent year on year in 2015, with the money and people involved rising 57 percent and 120 percent, according to data from the task force.

In the first quarter of this year, over 2,300 cases were found, with those disguised as Internet finance and e-commerce activities increasing particularly fast, police statistics showed.

One of the biggest cases involved Internet peer-to-peer (P2P) broker Ezubao, which was found earlier this year to have cheated about 900,000 investors out of more than 50 billion yuan (7.6 billion U.S. dollars) through fake investments. An executive from the parent company has admitted that it was nothing but a Ponzi scheme.

Internet finance 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 online brokers. But risks piled up too, as regulations could not keep up with the sector's development.

As of the end of March, more than 1,200 online lending platforms had halted operations, had difficulty meeting deposit withdrawal requests, or saw their executives flee due to financial problems. That number accounted for about a third of the total, according to industry information provider wdzj.com.

The crackdown will build on previous measures targeting e-finance and prevent risks from spreading, according to business insiders.

In December, China's banking regulator said P2P platforms should be prohibited from taking in public deposits, pooling investors' money to fund their own projects, or providing any kind of guarantee for lenders.

By upping the ante, the new crackdown can eliminate critical risks in e-finance, said Yang Fan, chief executive officer of iqianjin.com, an online lending platform.

He believes the campaign can effectively address rampant fraudulent activity, such as false advertising and lack of transparency.

Deng Wei, CEO of online wealth management firm jindanlicai.com, supports removing illicit players from the industry, saying it will benefit the sector's long-term development as many ordinary investors can not tell which investment products are reliable and which are not.

"The overhaul will lead to a massive industry reshuffle, which is good news to those following the rules," said Liu Feng, CEO of online lending platform Helloan.

The trend can already be seen from a decline in the number of online lending platforms in recent months, as some of those operating illegally already shut themselves down, according to Ma Jun, chief analyst of wdzj.com.

Meanwhile, Ma suggested the government not "overdo things" in the crackdown and protect the healthy development of e-finance.

While tightening regulation on Internet finance, the government should also provide adequate support for the sector, which plays an important role in funding small businesses and entrepreneurs, said a commentary carried by the People's Daily on Thursday.

"The government is not suppressing the industry but cleaning it up... it will not be a harsh winter for Internet finance, but the start of spring," it said. Endi