New Rules Leave China’s Online Lenders Facing Sweeping Changes

China’s online lenders helped fuel an equity roller-coaster that saw the benchmark index rallying more than 150 percent in the 12 months through June 12 before abruptly crashing.

China’s online lenders helped fuel an equity roller-coaster that saw the benchmark index rallying more than 150 percent in the 12 months through June 12 before abruptly crashing.

Photographer: Philipe Lopez/AFP via Getty Images

China’s more than 2,000 online lenders face sweeping changes in their businesses after the country’s financial regulators imposed strict new rules on the booming internet finance industry.

Some online platforms will need to stop their recent practice of extending loans, and act only as intermediaries between lenders and borrowers, said Xu Hongwei, the chief executive officer of Shanghai-based Yingcan Group, which tracks the country’s peer-to-peer lenders. About 90 percent of the websites will need to introduce changes of some kind, such as improving disclosure and appointing banks as custodians for their clients’ assets, he added.

China’s online lenders helped fuel an equity roller-coaster that saw the benchmark index rallying more than 150 percent in the 12 months through June 12 before abruptly crashing.

A few platforms will go out of business because they have effectively been behaving like Ponzi schemes, by raising money from new investors to pay off wealth management products they had sold to previous investors, Xu said.

“We will embrace the biggest reshuffle of the online lending industry. It’s going to be long and painful,” said Xu.

China’s central bank, the People’s Bank of China, announced new rules on Saturday which require the online sites to serve only as intermediaries between lenders and borrowers, and banned them from “enhancing borrower creditworthiness” by raising funds of their own to lend out.

Under the rules, the central bank will supervise online payments while the China Banking Regulatory Commission will oversee online lending, trusts and consumer finance. The China Securities Regulatory Commission will handle equity crowd-funding and online fund sales.

Lending through the online sites surged almost 13-fold since 2012 to $41 billion last year. In many cases, the sites were behaving as true peer-to-peer lenders by matching individuals with excess funds with businesses in need of capital. However, in some cases the platforms were acting as lenders themselves, offering leverage for investment in the stock market.

“Finally having regulations in place is positive to the industry and those who have been pro-actively preparing for it,” said Xu. “The laggards are pretty much doomed,” he added.

Chinese banks may benefit from the new regulation of the industry, gaining new clients for their wealth management operations and perhaps buying some of the peer-to-peer sites as the sector consolidates, BOCOM International Holdings’ analysts led by Li Shanshan wrote in a note on Monday.

— With assistance by Jun Luo

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