A New Round of Government Control on China's Internet Finance Industry

Written by Felix Yang || October 19 2016

Last week, the People’s Bank of China (PBOC), China Banking Regulatory Commission (CBRC), China Securities Regulatory Commission (CSRC) and China Insurance Regulatory Commission (CIRC), who are collectively known in China as the “Yi Hang San Hui” (one central bank, three commissions), have issued four major implementation plans around Internet finance. The plans are aimed at reducing risk and further issues in the internet finance industry. Although the regulations will mean tighter controls around internet finance and fintech development in China, it should result in a more healthy environment for the industry in the future.

The four main implementation plans are related to four main financial areas in the Chinese market: P2P Internet Lending, Equity Crowd Funding, Internet Insurance, and Non-Bank Payment Institutions. The task group also involves other parties such as Ministry of Industry and Information Technology (MIIT), Ministry of Public Security, and State Administration of Industry and Commerce, etc., so is one of the most all-encompassing and far-reaching regulations so far. 

P2P Lending

The new regulation around P2P lending emphasizes the 'information agency' nature of what the regulators want P2P lenders to become. Rather than being a fund themselves, they should be a conduit between consumer or business entities that are either looking to invest or to borrow. The regulation banned related illegal activities such as pooling money privately, false propaganda about risk and return, and setting up property investment funds without permissions, etc.. It also made more limitations about the business range for P2P companies, and emphasized the rules of forced bank deposit under certain management account. Other companies related to school loans and property investment are under a close legal check too.

Equity Crowd Funding

The supervisors listed eight typical problems the crowd funding companies could be involved in. For example, the platform's true identity must be shared in any transaction. Platforms cannot mislead investors, issue faulty investment products, and there can be no informal cooperation between funding platforms and other financial institutions.

Internet Insurance

Digital insurance companies were warned under the implementation plan about expanding their business into unfamiliar industries. Because of the popularity of digital insurance platforms in China recently, many unqualified platforms were set up to sell insurance products, as well as to pool money illegally. For insurance companies, cooperation with these platforms is forbidden. Insurance companies are also required to control the risk that other illegal parties may make use of their brands or business names in other transactions. 

Non-bank Payment

For non-bank payment companies, the government is more focused on the excess reserve use which previously was moved and invested in other products, thus putting customer's capital at risk. The new rules mean that all reserves must be kept in particular safe investment vehicles and places. At the same time, payment companies with a license will be strictly punished. This regulation ties into the previous regulation around 3rd party payment providers and licensing regime that was previous in place. It should also put a damper on the recent M&A that we've seen in the industry as internet players look to have their own digital payments platform.

In general, the new implementation plans under “one central bank and three commissions” are designed for tighter control of the Chinese financial market. It is considered a must for a long-term and effective supervision program under current market conditions. However, it also raises concerns about the effects on the growth of investment in financial technology and other related innovation in China. The government sounds confident in these regulations to help realize its goals of promoting an orderly and healthy industry yet, still provide strong support to real innovation and entrepreneurship.

These plans were to be expected from regulators. For a long-time, the internet finance industry ran with very little guidance from regulators, which this new regulation certainly brings. Although it is 'regulation', the structure and wording of the plans certainly supports the continued development of the internet finance industry in general and shouldn't affect long-term development.