Strict regulation is expected to boost the online lending sector on the Chinese mainland, while industry insiders in Hong Kong are still testing the waters to see how far they can go.

The China Banking Regulatory Commission (CBRC), the country's top industry watchdog, said on Jan 20 that it has started a process of major restructuring for the first time since its founding in 2003 to suit the industry developments in recent years.

A new department named "universal benefit" will be in charge of supervising small and medium lending, as well as online lending, represented by booming peer-to-peer (P2P) lending business on the mainland in recent years.

"The specific authority in charge will strengthen regulation over this industry, and benefit its development," said Guo Tianyong, professor at the School of Finance of the Central University of Finance and Economics, Beijing.

The trading value of mainland's booming P2P platforms hit 250 billion yuan ($40 billion) for the whole of 2014, doubling the statistics of 2013 and almost 13-fold the figures in 2012, according to the Internet Society of China.

Generally speaking, P2P platforms are Internet sites that match investors with individuals and businesses seeking small loans. As unlicensed, non-financial firms, the P2P platforms cannot sell investment products, collect deposits or pool the funds they take in.

But due to the ambiguity of laws and regulations, many players are stepping out of line. Of the more than 1,600 platforms, more than 250 are having difficulties repaying money, and more than a third are fraud companies, according to Xinhua in late December.

Analysts believe the latest move by the CBRC aims to help resolve the problems.

"P2P business on the Chinese mainland will see an end to 'savage growth'. The threshold will become higher as the authority clarifies requirements and business scope. Meanwhile, as banks, e-commerce platforms and other powerful players join the competition, industry consolidation will become more intense," said Kevin King, attorney with the Deheng Law Firm's Shenzhen office.

Legislation on P2P sector is currently unlikely, but it is highly likely that the CBRC will issue industry rules to regulate the business, King added.

Emphasis should be placed on qualification approval, King said. Platforms must be required to register with a certain amount of capital, the higher the better. Meanwhile, it is crucial to bar P2P platforms from guaranteeing loans or pooling funds, he added.

The cautious Hong Kong story

Compared to the mainland, where P2P lending has been developing rapidly for more than two years with risks sufficiently exposed and the sector poised to enter the next phase of maturing with the regulator stepping in, Hong Kong is just seeing individual cases beginning to emerge. Haitong International Securities Group Ltd, a unit of the second-biggest brokerage on the Chinese mainland, announced the launch on Jan 22 of its P2P internet financing platform Bestlend.com. The platform links individual borrowers with local licensed finance companies, and offers customized interest rates based on valuation of the borrowers' credit.

However, the biggest difference between Haitong International's business model with peers in the mainland and the US is that individual investors cannot directly invest the loan on the platform.

According to the Money Lenders Ordinance of Hong Kong, a person carrying on business as a money lender in the SAR must obtain a license for the purpose.

"Restricted by this regulation, individual investors cannot directly lend money on P2P platforms in Hong Kong," said Chen Yuanfei, assistant director of internet financing at Haitong International Securities Group.

But a comprehensive individual credit system in Hong Kong and strict supervision will make the unsecured loan safer, attract individual borrowers and help collect big data, paving the way for other business, she noted.

Haitong's online lending platform arrived later than Hong Kong's locally born P2P lending platform WeLab Holdings, which in 2014 won capital support from Sequoia Capital, a Silicon Valley-based venture capital fund, and TOM Group, a Chinese media group controlled by Asia's richest man, Cheung Kong tycoon Li Ka-shing.

But Chen believes that Haitong International has its own advantage - the linkage with the vast mainland market.

In theory, there is no specific regulation that restricts mainland individuals from investing in loan products in Hong Kong, she noted. In other words, if a mainland investor is willing to buy a loan product offered by the Bestlend platform, they should not be bound by the Hong Kong Money Lenders Ordinance.

"Our target is to offer a good variety of loan products to the investors, while the investment from individuals will in turn, boost the development of small business and innovation," said Chen.

Industry insiders in the P2P lending industry are taking Lending Club in the US as a role model nowadays. Lending Club raised $86 million in December through its splashy initial public offering in New York, and saw share prices soar by 56 percent on the first day of trading.

But that act will not be easy to follow, many analysts point out.

"The key of the Lending Club business is asset securitization. The platform is buying loan assets from banks and transforming them into a security, which can be directly purchased by individual investors," noted Wang Fang, general manager at Bankrate China, a consumer financial services provider.

"Securitization is far from mature on the China market. However, once the authority loosens control over this sector, P2P business will have spectacular potential," she added.

xieyu@chinadaily.com.cn

(HK Edition 02/06/2015 page9)