Regulation crucial for success of P2P online lending

As one of the world's largest online financial markets, China is currently going through a quiet crisis: Many Internet-based money lenders are sinking, along with the funds they owe to their creditors.

The crisis may last into the middle of the year and incur a total loss of 100 billion yuan ($16 billion) to the creditors, mostly individuals with small savings, according to Guan Jianzhong, president of the Chinese ratings agency Dagong Global.

Internet-based instant lending and borrowing between strangers is called peer-to-peer lending. And the websites enabling such transactions are called P2P platforms.

Online financial services, although growing in leaps and bounds, are still in their infancy in China, and as a result "there are still few laws and regulations applicable to the industry", Guan said.

At the end of 2014, Dagong reported that more than 80 percent of China's P2P platforms were considered high-risk. The company's latest warning, issued on March 21, said that of the 1,587 P2P platforms it was monitoring, 393 were blacklisted, while another 668 were given risk warnings.

According to 100EC.cn, an e-commerce research body, there were 1,646 online lenders in "normal operation" in China by the end of February.

Online lending is one the most active areas in China's Internet financial market. It is concentrated in such places as Guangdong province and large cities including Shanghai and Beijing.

But its most serious shortcoming is that creditors usually don't have control over the platform operators, and therefore their rights are not duly protected.

The Chinese-language press has reported, with increasing frequency, about protests by creditors angry with the loss of their money on P2P platforms that failed or even vanished without a notice.

Shenyang Daily reported on March 17 that 90 P2P platforms closed down in December, the highest month for failures in 2014, followed by another 113 since the beginning of this year.

Introducing regulations for China's online financial market is an urgent task, Ma Weihua, a veteran banker and former chairman of the China Merchants Bank, said during this year's session of the Chinese People's Political Consultative Conference's National Committee in early March. But he also acknowledged the difficulties in trying to regulate a still rapidly growing industry.

Speaking also at the session, Li Kemu, former vice-chairman of the China Insurance Regulatory Commission, said the Internet may create as many new problems as it overcomes old ones, "an asymmetry of information is always a hotbed of moral hazard".

Industry specialists say they expect the central government to come up with a regulatory guidance for the Internet financial market by the middle of the year.

It is only after that the market can grow healthier. But between now and then, Tian Haishan, a researcher at the Chengdu-based Southwest University of Finance and Economics, said there should be more attempts to rate P2P platforms, as industry regulation takes shape.

Huang Zhen, a professor at the Central University of Finance and Economics points out that it is crucial that P2P lenders learn how to use credit ratings to shore up their own standing in the industry.

After publishing its first blacklist of high-risk P2P platforms, Dagong Global seems to have seen a rising demand for its services. It is now recruiting people to meet its target this year for a large Internet financial department of 1,000-strong staff.