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UPDATED: July 18, 2015 NO. 14, APRIL 2, 2015
Lending a Hand to Lenders
Detailed rules are in the pipeline to tackle surging risks in the unregulated P2P lending sector
By Zhou Xiaoyan

Although Lufax issued a statement contesting Dagong's negative rating on March 16, the public spat between Lufax and Dagong alerted investors to the mounting problems facing the industry.

Of China's more than 1,600 lending platforms, 275 went bankrupt or had difficulty repaying money in 2014, up from 76 a year earlier, according to Wangdaizhijia.com.

"The number of bankruptcies may reach 500 this year," warned Zhu Mingchun, Chief Marketing Officer of Wangdaizhijia.com.

Reining it in

As more risks lurk in the P2P lending sector, there has been mounting outcry from the general public for tight supervision from the government.

During the Third Session of the 12th National People's Congress, the country's top legislature, from March 5-15, central bank governor Zhou Xiaochuan said a new regulation targeted at Internet finance was in the making and would soon be released.

"Regulation is good news for the whole industry as it can sort the wheat from the chaff. It's definitely good news for P2P online lending platforms that have already implemented strict risk control and standardized their operations. They will enjoy stronger growth after the release of government regulation," said Zhou Chunsheng, an economics professor with Cheung Kong Graduate School of Business. "A business reshuffle is on the way."

Zhang Jun, CEO of Ppdai.com, another P2P lending platform, hailed government supervision.

"Supervision is a good thing for the industry. There are three important elements when it comes to reduce risks: third-party custodians for clients' money, transparent information disclosures and protection for investors," Zhang said.

In January, China Banking Regulatory Commission restructured its affiliated departments and a special department, called the Financial Inclusion Affairs Department, was established to target the country's fledging P2P lending industry.

According to media reports, the Financial Inclusion Affairs Department held an indoor meeting with industry insiders on March 11 to discuss a draft regulation for the P2P online lending sector, but final rules have yet to be set.

Reportedly, the draft regulation includes a market entrance threshold--a minimum of 30 million yuan ($4.8 million) in registered capital for operators--and strict conditions on the leverage management among others. The leverage ratio, which means the amount of outstanding loans against the registered capital, should be lower than 10 times in P2P lending platforms, according to the draft regulation.

Guo Hangyu, co-founder of Dianrong.com, a P2P lending website, said 30 million yuan ($4.8 million) in registered capital seems like an appropriate amount.

"If the market entrance threshold is too low, there will be risks. If it's too high, it will hamper financial innovations," Guo said.

Guo, however, questioned the 10 times leverage limit, saying excessively stringent boundaries will limit the sector's development.

"Using the leverage ratio to regulate financial institutions is a traditional regulation mindset, such as for banks. Internet finance is different from traditional financial institutions. Using the leverage ratio to manage it may not be able to hedge the risks inherent to P2P websites," said Guo.

"For instance, if a P2P website has a large amount registered capital, it's allowed to have a large amount of outstanding loans. But the website may still fail due to poor risk control," Guo exemplified. "Therefore, their capacity for risk control will be the lifeline for P2P lending platforms and government regulation should focus on that."

Zhou Shiping, Board Chairman of Hongling Capital, a P2P lending platform, agreed with Guo, saying the 10 times leverage limit contradicts the regulator's theory that P2P platforms are information intermediaries.

"If they are only information intermediaries, why would they be subject to leverage limit? The regulation mindset for P2P industry should be totally different from that for banks. Whether a platform is reliable or not has little to do with its leverage ratio," Zhou said.

"Some P2P lending platforms are loan sharks in disguise. To avoid risks, investors should choose the established players in the market," Wan, the senior project manager, commented. "I think government supervision is bound to bring big changes to the sector."

Just like Wan, hundreds of thousands of investors are counting down the days till the regulation is implemented--but for now, they are on their own.

Copyedited by Kieran Pringle

Comments to zhouxiaoyan@bjreview.com

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