Chinese authorities have imposed new rules to curb an unruly segment of online lending, capping the amount of credit available for borrowers and limiting the products the platforms can offer.
The new rules issued Wednesday take aim at internet-based platforms that have experienced explosive growth catering to smaller borrowers usually passed over by the state banking system. Known as peer-to-peer lenders because they are supposed to match small-scale lenders and borrowers, these platforms have expanded to offer a range of high-yielding investments, with nearly $100 billion worth of loans outstanding. Some have imploded, leaving trails of debt and protests.
Under the regulations, individuals are restricted to borrowing up to 200,000 yuan, about $30,000, from a single peer-to-peer, or P2P, platform and 1 million yuan total from different P2P lenders. For companies, the caps are 1 million yuan on a single platform and 5 million yuan in aggregate.
The platforms themselves will also have to purge offerings of insurance and other products that advertise high returns and limit themselves to online matchmaking services between lenders and borrowers, according to the rules.
Online lending has evolved rapidly in China, running ahead of the regulators as the economy slows and people look for ways to get better returns for their savings. While the new regulations target “internet credit companies,” the definition leaves untouched other types of lending platforms that rely on crowdfunding and market investment services to the public.
Though the new regulations took effect immediately, platforms were given a year to adjust their practices. Industry executives said enforcing the caps would be difficult given the lack of available information.
“The new rules to cap borrowing might be too strict for some P2P lenders and hard to implement, as there is no information available for them right now to track how much borrowers are actually borrowing from other platforms,” said Paul Shi, chief executive of Wangdaizhijia, an industry data provider.
Still the rules are likely to further consolidation among the sector’s many players, executives said, and show the government’s commitment to clean up the sector, without banning it.
China’s banking regulator, along with the national police ministry and two internet regulatory agencies, issued the rules, which update draft regulations announced late last year when the sector’s runaway growth began to founder with several implosions.
By the end of June, there were 2,349 platforms operating in China, with 621.3 billion yuan in loans outstanding at the end of June—five times the amount they had at the end of 2014, according to data from the banking regulator. The data show that more than 40% of the platforms were found to have problems at the end of June.
The most notable collapse was Ezubo Ltd., which left investors short of $7.6 billion. The government said Ezubo had wooed investors with promises of high-interest payouts from leasing projects, 95% of which authorities said were falsified.
“The direction is to move online platforms to where you are responsible for what you originate so it would be hard for someone to do something like Ezubo,” said Soul Htite, the American co-founder of the LendingClub Corp. in the U.S. Mr. Htite also founded Dianrong.com, one of China’s largest P2P platforms.
Among the new restrictions, P2P lenders are required to put investors’ money under custodial supervision of commercial banks. Under these arrangements, banks would have to disclose an array of data including the platform’s number of borrowers and lenders and its volume of bad loans.
Also banned are the pooling of investments and reselling the collected funds as high-yield “wealth-management products”—a common past practice that drew in many investors. P2P platforms will also no longer be allowed to provide guarantees to clients, which had stoked public unrest in some cases when platforms became unable to pay.
Peer-to-peer platform executives had privately worried that the custodial arrangements, which oblige P2P operators to grant broad powers to banks, would weigh on the industry’s growth.
Established platforms broadly welcomed the regulations. Industry executives and analysts said the custodial provisions and other restrictions should favor the healthier players with larger businesses.
“Further consolidation is inevitable as the rules of the game change,” said Martin Chorzempa, an analyst for the Peterson Institute for International Economics. “The pace of growth from 2013-2015, when an average of three platforms per day went online, was clearly unsustainable.”
By: Chuin-Wei Yap (The Wall Street Journal).
Contributing: Grace Zhu.
Photo: Reuters.
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