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China Creates New Regulations for Internet Finance Companies

ChinaAccording to financial analysts, China’s latest Internet finance laws reflect its support of incumbent banks.

Earlier this month, China’s banking regulator, securities regulatory, and banking regulator, along with seven other agencies created guidelines to help define “Internet finance” and identify and categorize agencies that regulate Internet financial institutions.

These guidelines are expected to support Internet financial services such as crowdfunded equity finance, peer-to-peer lending, asset management, and online payments by giving them a set of clear regulations so that they can comply with them and develop a good reputation. Xu Hongwei, the chief executive officer of an online P2P tracker called Online Lending House, said:

Regulation will standardize operations and expose the industry to sunlight.

Practices that were seen as existing in a grey area will be forbidden. But regulation will also increase operating costs, causing some of the lower ranking and weaker players who can’t make the cut to go bankrupt. And it will raise barriers to entry. Average people won’t be able to get in any more.

According to analysts, bigger Chinese players such as Zhejiang Ant Small & Micro Financial Services, a finance affiliate of Alibaba, will stand to benefit a lot by these regulations. Alipay, China’s leading Internet payment processor, which is controlled by Ant Financial, and Yu’E Bao, Chinas largest money-market fund, are among the firms that will benefit.

Other leading Internet finance firms are Shanghai Baosteel Group’s Ouyeel, which supplies funds for steel traders; Lufax, a subsidiary of Ping An Insurance; and a China Merchants Bank unit called Small Enterpreneur.

During the past two years, peer-to-peer lending has experienced rapid growth, with outstanding loans touching the $33.7 billion mark at June end. Simultaneously, the peer-to-peer lending sector stands accused of using objectionable sales technique and unreliability.

Today, there are over 2000 operating peer-to-peer lending firms. The new regulatory framework will clearly distinguish between banking and peer-to-peer lending, requiring the latter to clearly inform customers that they cannot give guarantees or receive deposits, but can only serve an intermediaries between lenders and borrowers.

But some industry representatives consider these rules to be restrictive. Yeepay CEO Tang Bin says:

The key is whether the detailed regulations give us breathing room and preserve enough flexibility to adapt to the Internet’s fast development.

Several third-party payment firms work in collaboration with peer-to-peer lenders and wanted to become custodians of investor funds on P2P platforms. Unfortunately for them, the new regulators only give banks this right.