China Tights Grips on Internet Financing

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china’s internet finance industry is booming. One bullish forecast suggests that the market size of Internet finance in China will be valued at up to 10 trillion yuan during the next five to ten years.

However， partly due to the lack of efficient industry regulation， there were many cases of Internet finance fraud over the recent years.

The regulation system need to be adjusted and improved along with the development of Internet finance， said a senior official from the country’s central bank， the People’s Bank of China（PBOC）.

Internet finance is a new thing in China， so there will be a long time before it can develop in a healthy and regular way， said Guo Qingping， vicegovernor of the PBOC， at a forum on the sideline of the Second World Internet Conference held in Wuzhen， East China’s Zhejiang province. Many senior technology company executives attended the three-day conference.

Guo pointed out that three pairs of relationships need to be taken care of for the Internet finance to further de-velop in the country.

One is the relationship between Internet finance and traditional finance.

Guo said："We need to support and regulate new forms of Internet finance， such as third-party payment， crowd funding and online lending platforms， and at the same time encourage traditional financial institutions to provide new products and services based on Internet technology， so as to build a coordinated financial system."

The second is to properly deal with innovation and risk control. "We need to stick to our bottom line of preventing systemic and regional financial risks and distinguish illegal activities from legal ones，" added Guo.

The third is the relationships between the government and market， administration regulation and selfdiscipline. The government， society and market should play their expected roles to build a modern governing system for Internet finance to develop in a continuous and healthy way.

Following the conference， China issued a flurry of Internet finance-related regulatory documents. On December 28th， the centre bank issued the final rules on online payments while the China Banking Regulatory Commission（CBRC） issued the draft rules on online lending for public opinion.

As the leading payment platform operators in China， Tencent and Alibaba have issued statements in Chinese media praising these final rules.

Internet Finance Boom

China’s Premier Li Keqiang has been keen to promote the use of Internet to spur a further economic growth amid current slowdown.

The booming Internet finance offers a glimpse of how the rest of the world may someday handle money but has seen a number of high-profile abuses.

Chinese Internet companies have transformed the average smartphone into a platform for cashless transactions， bank transfers， loans and investments far beyond what is common in the U.S.

In 2014， nearly a quarter of China’s population， a number bigger than the total U.S. population， made payments online. Data provider Euromonitor International estimates that China’s mobile payments in 2015 will total $213 billion， compared with $163.5 billion for the U.S. The biggest payment service， an affiliate of e-commerce giant Alibaba Group Holding Ltd. called Alipay， has 400 million users.

“These numbers are phenomenal when compared to other payment providers that operate globally，” said Ng Zhi Ying of Forrester Research Inc.

Internet companies are pushing to allow users to open online-only bank accounts on their smartphones， with their identities confirmed via selfies. Meanwhile， China’s peer-to-peer， or P2P， lenders， which connect investors with borrowers through online networks， are set to make $33.2 billion in loans last year， 43% more than in the U.S.， and could see issuance triple over the next two years， according to Morgan Stanley projections.

Chinese Internet giants including Tencent Holdings Ltd. and Alibaba affiliate Ant Financial Services Group are taking the next step by opening Internet-only banks.

The Internet giants have proposed allowing prospective customers to open new accounts through facial-recognition software using their smartphone cameras. Such technology would allow users to open regular bank accounts remotely and for the banks to receive deposits.

While bank regulators haven’t approved it， industry players said discussions with the companies continue.

“I can understand that regulators are very cautious，” said Jason Lu， who is in charge of fraud risk management at Ant Financial Services Group. “This is a very， very important milestone， we are pushing technology into financial services， which is the most heavily secure， sensitive area.”

With many skipping credit cards entirely， Chinese people buy moneymarket funds， split a restaurant check and pay for services ranging from taxis to takeout food all within the same phone app.

“In China， you see a lot of stuff happening for the first time over the mobile and Internet platforms，” said Tim Pagett， financial-services industry leader at Deloitte China， adding that Chinese consumers may soon buy cars and insurance via their phones. In terms of how widely Internet finance is used， he said， “China is far ahead of the rest of the world.”

Internet finance in China has skyrocketed largely because traditional banks haven’t provided many individuals with access to investment vehicles and other ways to increase their money. Banks have stuck to lending primarily to state-owned enterprises because they have implicit or explicit government backing for debt repayment， which makes them seem more secure.

Internet finance is touching parts of China’s economy―everybody from students to farmers to truck drivers―long denied credit in China’s staterun banking system. In the port city of Tianjin， long-haul trucker Shi Junze fell on tough times two years ago when transportation fees dropped and clients delayed payments. “We were at a point where we basically could no longer maintain our trucks，” Mr. Shi said. “And banks wouldn’t give loans to ordinary people like us.”

“Traditional banks are only for savings，” said Hu Yu， a 24-year-old entrepreneur in the city of Hangzhou. Mr. Hu said he used an online bank backed by Tencent to invest 40，000 yuan in a money-market fund offering an 8% annual interest rate， a much higher rate than bank deposits.

Call for Regulation

China is “a big gray area，” said Fan Bao， chairman and chief executive officer at the boutique investment bank China Renaissance， which has done deals involving Internet finance companies.

Numerous online companies have been launched since 2013 in areas such as P2P lending， crowd funding， microfinance， and wealth management businesses. Before then the country’s finance sector was dominated by stateowned institutions.

P2P lending， in particular， has grown rapidly over the past two years with at least 2，000 firms aggressively expanding their online businesses to cater to the growing demand among both lenders and borrowers.

However， currently， dozens of platforms in P2P lending shut every month， with operators running away with funds put in by investors.

Now， Chinese regulators have moved to lay down some ground rules. They issued guidelines limiting what payment platforms can do and proposed draft interim rules on the P2P lending industry， where explosive growth has been tainted by cases of alleged fraud.

“The opportunities and the risks of Internet finance are proportional， which means they are both immense，” said Joe Ngai， director and managing partner of McKinsey & Co.’s Hong Kong office.

Regulators have also resisted approving technology， such as facial recognition， for opening full-service online bank accounts without the need for physical outlets or ATMs.

The People’s Bank of China’s said that China doesn’t have basic standards for biometric technology and no national or industrial standards for its use in the financial sector. “Therefore， the conditions are not yet mature for using biometric technology as the primary means of verifying the identities of depositors，” the central bank said.