China's banking regulator finally moves on P2P lending regulations

Written by Paolo Di Fonzo || January 02 2016

China’s Banking Regulation Commission (CBRC) has played with fire long enough, standing on the side and watching the story of online peer-to-peer lending unfold, as it started with a tremendous rise from 2013 to 2014 and to quickly turn into a machine of fraud and risk, potentially damaging countless individuals who were naïve enough to trust this system.

Without clear rules, P2P lending in China kept operating in a grey area, with sites continuing to accumulate money from lenders through guarantees on returns, and then giving this money to any kind of borrower. When things turned bad and borrowers failed to repay their debts or returns did not meet promises (as with the astronomical number of players in the market competition became that much intensive that many firms were guaranteeing insane returns) many firms simply disappeared as the owners would just run off with the money, leaving behind a trail of angry lenders with no one to complain to.

At last, the CBRC decided that, guess what, this was an issue at social, legal and financial levels: of course many people were angry with how things were going with, by the CBRC's own estimates, nearly 30% of P2P lending platforms were “problematic”, but the problem goes beyond just public opinion.

Peer-to-peer lending has been a useful solution and a convenient answer to the arising problem of lack of capital for SMEs, which constitute the back of Chinese economy and which were struggling to sustain the expensive borrowing coming from banks. And this is not to say that there aren't solid Chinese P2P lending platforms our there. Yirendai and Dianrong are two examples that seem to have their ducks in a row when it comes to lending and are doing very well. 

If China's P2P platforms continued to fail, the lack of trust in this specific lending system would set things back, reopening the question of how SMEs should get financial assistance without this meaning a radical change in interest rates in the whole banking system. So, right at the end of 2015, the CBRC finally released a draft to take control of the situation, focused on the elements judged to be more urgent.

First of all, the goal of the new regulation is to take platforms back to a marketplace function, so simply enabling borrowers in need for capital to meet with potential lenders wanting to invest their excessive money. This is achieved by banishing guarantees on returns and prohibiting the possibility for these companies to take loans on their balance sheet (so effectively, that money does not go through the sites' pockets so to speak). Second, P2P lending platforms will no longer provide principle or return guarantees, which had previously been quite common in China. And finally, P2P platforms should only be 'selling' P2P lending products, not wealth management or other products; how this affects companies like CreditEase who created a separate entity under its control in charge of wealth management, is unclear.

To reduce risk of frauds and bad loans spreading through the financial market new transparency standards were also established, such as forcing companies to provide publically availability data on key statistics like bad loan ratios, total amount of loans brokered and so on, while on the lending side they will have to register at the local financial regulator and ask for a license; at the same time the total amount of loans available for each borrower will be limited too.

Overall these controls should force a break on the rising amount of criminal activities and, hopefully, curb careless lending, which is something that over time would create a systemic risk that China’s financial market cannot afford at the moment. On the other side it is designed in a way so that SMEs could still receive the capital they need without being forced to overpay loans to banks.

It is puzzling how it took so long for the CBRC to realise these problems and, especially, how many months have passed before it could come up with an answer, but still, better late than never.