Unruly and unregulated, nation’s Internet finance sector urgently needs supervision

By Wang Jiamei Source:Global Times Published: 2017/8/21 18:48:39

Many say that winter is coming for China's Internet finance sector as the National Financial Work Conference in July emphasized strengthening supervision over the sector.

After years of explosive but unruly growth, the online finance market requires cooling through tighter regulation.

China's Internet finance industry has surpassed its counterparts in the US and other Western countries in terms of technological development and market size.

As early as March 2016, Citigroup issued a report saying that China had the largest peer-to-peer (P2P) market in the world, with cumulative lending of about $67 billion in 2015, equivalent to nearly four times that of the US and more than 10 times that of the UK.

Generally speaking, financial development levels in Western countries are more mature than those in China, but they all lag behind this country in Internet finance development.

A major reason for this apparent paradox is that regulators in developed countries prefer to have a comprehensive regulatory system in place for Internet finance before fully liberalizing the market.

On the contrary, there were few regulations to guide or hamper China's Internet finance industry, with no such requirements as reserve levels or loan-to-deposit ratios. The near-absence of regulation greatly lowered the barriers to entry for the sector, which witnessed both explosive expansion and high failure and fraud rates as it grew. Take P2P lending platforms, for example. As of the end of July, 5,916 P2P lending platforms had been set up in China, but only 2,090 were operating normally, with the rest either encountering liquidity problems or simply closing, according to statistics from wangdaizhijia.com, a P2P industry portal.

Due to the lack of regulation, Internet finance is often associated with financial irregularities, with many players operating without obtaining any license. Such irregularities may easily cause chaos in the financial order as many financial institutions might securitize high-risk assets and sell them to investors who don't have the appropriate levels of risk tolerance and knowledge, Yin Yong, deputy governor of the People's Bank of China, told a conference in Beijing over the weekend.

Some may argue that the rapid growth of Internet finance, in particular P2P lending, has met the needs of small and medium-sized enterprises, which find it hard to borrow from banks and other formal channels. But obviously, the chaotic development of Internet finance won't help China's economic restructuring. Rather, it will only pose risks to the country's financial stability.

Only a regulated Internet finance industry can serve and support the real economy, facilitating China's economic transformation.

The author is a reporter with the Global Times. bizopinion@globaltimes.com.cn


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