Is regulation a help or hindrance in China?

Peer to peer lending is booming in China. It is estimated that there are nearly 1,500 platforms and the total lending balance of peer-to-peer platforms in August stood at a staggering 58bn Yuan.

Last month The China Banking Regulatory Commission (CBRC) issued a preliminary set of rules for governing the industry and more regulations are said to be on the way. As explained in a previous article, the Chinese regulatory framework has up to now been rather “loosely defined”. This is highlighted by the fact that since 2011 over 1,000 platforms have been closed down.  

The larger, more established platforms are calling for heavier touch government regulation in order to protect the sector’s image and credibility. They say that an increase in regulation will help the sector develop in a more controlled environment.  

It’s been suggested that the new regulation is likely to bar peer-to-peer platforms from guaranteeing loans or pooling funds. The latter measure would bring some much needed transparency to this uniquely opaque industry. The models of Zopa and RateSetter work in the UK where regulators and trade bodies keep a close tab on standards of conduct. But in the labyrinth-like Chinese industry – it would not bode well for the investor to have no control over who their money is lent to. It is also thought that platforms will be required to register with between 10 and 15 million Yuan in capital. These capital controls should help to give to the sector more stability and to cut out the potentially destructive players.  

However, there is a real risk that these developments could drive some platforms underground – removing them entirely from the view of the regulators. In effect, too stringent a regime might result in a kind of peer-to-peer lending “black market” emerging.

The CEO of China Financial Services Holdings, Luo Rui, said that “harsh regulations would cripple the industry” – and that it’s something that the regulators should be looking to avoid. The platforms are reportedly mostly concerned that the regulation “doesn’t touch their bottom line”.

The hope of course is that increased regulation will help to anchor the industry. Some believe that the sector has already drifted away from its roots and become more bank-like in the process. For example, many platforms now sport a system of branches – which is (save for one exception in Folk2Folk) unheard of in Europe.

The head of Zero One Finance Research institution has said that the number of peer-to-peer transactions reached $17.9 billion last year and is expected to rise to between $40.72 billion and $46.87 billion this year. The industry has displayed enormous growth potential already, and proper regulations should attract even higher volumes of quality capital.