News Analysis: China tightens P2P lending to control risks

China's latest peer-to-peer (P2P) lending regulations will help prevent financial risks, protect investors' legitimate interests and foster inclusive finance.

In a document released by the China Banking Regulatory Commission (CBRC) on Wednesday, 13 restrictions on P2P platforms were introduced, prohibiting them from accepting public deposits, pooling investors' money for their own projects, providing guarantees for lenders, or selling financial products.

P2P lending, lending without a traditional financial intermediary such as a bank, has grown fast in China over the past few years, as investors seek higher returns and small businesses and individuals find it easier to secure funds online.

But there are inherent risks, as regulations have not kept up with the sector's development.

At the end of June, there were 2,349 lending platforms in normal condition. And 1,778 others had operational problems, accounting for more than 40 percent of the total.

Outstanding loans issued by P2P platforms (in normal condition) reached 621.3 billion yuan (about 93.6 billion U.S. dollars) at the end of June, according to CBRC data.

To prevent credit risks, the CBRC has set limits on the total value of loans borrowers are allowed, in accordance with their risk management capability.

An individual is allowed to borrow up to 200,000 yuan on one P2P platform, and up to 1 million yuan over several platforms. For companies and organizations, the ceilings are set at 1 million yuan per platform and a maximum of 5 million yuan over several platforms, according to the document.

The limit will guard against the credit risks brought by very large loans, said Zeng Gang, a banking researcher with the Chinese Academy of Social Sciences.

The principle of lower loans should be followed in the regulating of Internet finance, as it can cater to small businesses that are sometimes not covered by traditional financial services, said Li Junfeng, an official with the CBRC.

Under the regulations, P2P platforms should leave investors' money in the custody of banking institutions.

Platforms must also disclose basic information about borrowers and financial projects to lenders, and their websites must include information on the number and volume of transactions and the bad lending rate.

The rules will return P2P lending entities to their core business and provide security to investors, said Yang Dong, a law professor with Renmin University of China.

The CBRC rules also emphasize that P2P platforms will not be allowed to operate offline. The CBRC will supervise the daily operations of P2P platforms and be responsible for the formulation of industry policies and regulations. Local financial authorities will also be responsible for the supervision of local P2P platforms.

The move strengthens the role of the CBRC in supervising online lending platforms, and such supervision is stricter and more effective, said Yin Zhentao, a banking researcher with the Chinese Academy of Social Sciences.

In addition, the CBRC released a negative list for online lending platforms, clarifying exactly what kind of business P2P lending firms can undertake.

Prohibited services include financing for stocks investment, futures contracts, debt assignment and other high-risk services.

The tightened rules will lead to a massive industry reshuffle, which comes as good news for those online lending platforms that follow the rules and having better qualifications, said Yang Yifu, one of the founders of online lending platform Renrendai. Endi