China’s Internet Finance is Burgeoning

Internet finance has affected traditional financial institutions such as commercial banks and investment funds. That trend is set to continue.

Many big banks now boast that they have a vast number of branches and employees， but within 10 years， the development of Internet technologies may cut the use of physical currency and thus the need to go to brick-and-mortar banks.

The mobility of technology allows lenders to refine their services and products and create new ones.

The use of big data and the Internet of Things will allow financial institutions to reach a larger base of customers.

Chinas Internet Finance Thrives

Wang Pengfei， vice president of a leading Internet finance company， has seen the industry grow in China at a galloping pace， along with some shady practices.

After working at a state-owned lender for a decade， Wang joined Weidai， an Internet finance company whose name means “micro-loan，” in 2014 when the industry was flourishing.

The industrys burgeoning development came as no accident to Wang and other market observers.

China has four large state-owned banks， and state-owned enterprises generally have easier access to financing. Many small companies are troubled by the financing bottleneck， cre- ating pent-up demand.

Meanwhile， working-class families struggle to figure out where to invest their savings to seek higher returns， and many of them move money online. China， home to the worlds biggest online population， also has a number of groups， such as college students， who are underserved by banks.

China has not established a sound social credit system， and credit cards are not as popular as in some advanced economies. Online payment has instead emerged as a well-received alternative to cash. Crowd funding has picked up momentum as a wave of entrepreneurship has hit the country.

The Boom has Its Costs

Development of Internet finance has helped broaden the financial reach， improve efficiency of financial services， give Chinese more investment options， and help some small businesses get badly needed loans， but the boom has its costs.

The first peer-to-peer （P2P） lending platform was launched in 2007， and exploded in popularity in China， with the number of such platforms surging 18 times between 2012 and 2015 and the combined transaction volume jumping about 40 times over the period， according to data from the State Information Center.endprint

P2P lending platforms helped link clients seeking better yields with borrowers starved for capital， but a report from leading industry information provider www.wdzj.com painted a grim picture. By March 2017， 3，607 Chinese P2P lending platforms had run into trouble or been forced to close， with only 2，281 platforms in normal operation.

With a relatively low barrier to entry in the industry， some high-profile fraud cases emerged and grabbed headlines， such as P2P lending platform Ezubao that cheated investors out of nearly 60 billion yuan （8.7 billion U.S. dollars） through fake investment projects.

In tandem with the rapid growth， Chinas Internet finance industry is afflicted with Ponzi schemes and some companies deviate from their main business to seek hefty profits .Some bogus lending platforms diverted client funds for other purposes， while online Chinese loan sharks illegally demanded nude photos as a form of collateral from cash-strapped female college students. These cases have triggered the concerns of regulators and a year-long industry correction.

On top of P2P lending， Internet finance also covers business such as third-party online payment， crowd funding， and other financial services.

Chinese Premier Li Keqiang said that the countrys financial sector was vulnerable to risks such as bad assets， bond defaults， shadow banking and Internet finance， with frequent illegal and corrupt activities.

Risk caused by the Internet finance industry has wide repercussions. Some P2P lending platforms resembled hybrid financial institutions providing clients with various financial services online， analysts said.

2017 is a Watershed Year

Regulations on Internet finance services such as thirdparty payment are relatively sound， but regulations in other areas need to be improved.

The pace of business innovation has outpaced supervision in recent years， with companies producing new financial products to bypass supervision and hurt investors interests.

Regulators face a steep learning curve， and they must keep abreast of the ever-changing industry landscape. They should focus on Internet finance companies business and what their financial products really mean for investors.

Businesses such as P2P lending， Internet-based insurance， third-party online payment， and online asset management were among key areas for strengthened supervision， industry observers said.endprint

For P2P lending alone， regulators have unveiled specific policies including 13 restrictions to prohibit P2P platforms from accepting public deposits， pooling investors money for their own projects， providing guarantees for lenders， or selling financial products.

Better consumer protection laws and regulations should be in place， and supervision of products from Internet finance companies must be strengthened， with better conflict resolution schemes to be established， an expert suggested.

2017 will be a watershed year for Chinese Internet finance as the rules are tightened， bringing the industry out of the wilderness.

The Risks Might Be Greater

While investors flock to newly listed Chinese microlenders， there are renewed concerns that default risks of these short-term unsecured cash loans might be higher than the lenders think.

Industry executives said most microloan borrowers roll over or add to previous debts with new loans from another lender， snowballing their debts， along with their risk of default. Also， a lack of an industrywide database that tracks and shares the credit information of borrowers also keeps lenders in the dark， these executives said.

More than 80% of microloan borrowers have at least one unpaid loan at the time when they apply for a short-term unsecured loan from another lender， according to data compiled by Intellicredit Inc.

Some microlenders said that 90% of their clients are borrowing from more than two lending platforms at the same time. A risk-control manager from a microlender said that bad debts could be significantly underestimated.

In fact， some investors questioned the level of bad debts at Qudian Inc.， which debuted in New York in mid-October. CEO Luo Min said in an earlier interview that Qudians nonperforming loan ratio is less than 0.5%. However， statistics from a third-party credit rating agency suggests the actual rate could be higher than what Luo said.

Analysts and market participants are calling for an industrywide credit rating system or information platform to lower the risks of fraud and excessive borrowing. In China， the state-backed National Internet Finance Association of China has said earlier it would establish such system， sources said.

Zhang Yexia， senior analyst at Shanghai-based consul- tancy Yingcan Group， said that only a third-party credit rating agency or the regulators have the capabilities to access a comprehensive database of online borrowers.

However， several players in the microloan market said that they have no intention to work or share data with credit rating agencies such as Sesame Credit or Qianhai Zhengxin， a credit rating unit of Ping An Insurance， citing conflict of interests.

The size of Chinas unsecured microloan market stood between 600 billion yuan （$90.82） and 1 trillion yuan at the end of March 2017， according to Yingcan Group.

It was reported earlier that the China Banking Regulatory Commission （CBRC） is internally discussing the possibility of a standardized the regulatory framework of the countrys microlending industry， and considering rules that will cap the annualized interest rates on short-term unsecured loans.endprint