Internet finance and private banking were two hot topics intensely discussed at the recently concluded Lujiazui Forum in Shanghai.
A panel discussion on the two topics was extended to nearly three hours from one and a half hours despite several efforts to wrap it up.
"All financial innovations began from so-called illegal practices," Guo Yuhang, founder and co-chief executive officer of online peer-to-peer lending platform Dianrong.com, told the two-day forum which ended on Saturday.
He said that it's usually the illegal practices that act as a catalyst toward financial reform.
China's financial sector has undergone innovation which has now spawned whole new areas of getting funding such as P2P lending and private banking to meet the needs of a diverse range of consumers — both individuals and businesses.
"We will possibly see an Internet finance company acquiring a traditional finance institution in the coming three to five years," Guo predicted.
He may well be right if transaction data of P2P industry and recent supporting measures unveiled by the Chinese government for private banks are anything to go by.
Online P2P lending, the Internet finance business that allows individuals to easily borrow money from other individuals and comes with higher interest rates, transacted a record-high 60.9 billion yuan (US$9.8 billion) in May, said Online Lending House, which tracks the sector.
The transactions are expected to exceed 800 billion yuan this year, it added.
On the other hand, private banks are lenders that are completely funded by private investment to serve small and medium-sized entrepreneurs.
The China Banking Regulatory Commission on Friday issued a directive on boosting the development of private banks, officially giving the green light to the registration and operation of private banks.
About 40 applications, all from domestic private enterprises, are on a waiting list and the approval results will be released within four months and the banks established within six months of being licensed.
Before the directive, a pilot scheme opened a limited number of such institutions. In 2014, the CBRC approved five private banks, including Shenzhen-based Webank and Hangzhou-based MYbank. Previously, China had only one private bank, China Minsheng Bank, founded in 1996 in Beijing.
Wan Jianhua, incoming president at Shanghai Internet Finance Association, said financial innovation is necessary as there is a strong demand from SMEs to borrow money to expand but they have difficulty in getting loans through the traditional banking system due to higher risks.
"The market sees solutions in channels like P2P lending and private banks, and I see them growing explosively in the future," Wan told the forum, an international platform to solicit ideas for China's financial sector.
Ling Tao, president of Shanghai Huarui Bank, one of the first registered private banks in China, said: "Diversity is essential to happiness. This works for the financial industry as well. What we will insist on doing is something different from state-owned banks — something small and delicate to better serve mass entrepreneurs."
Despite the optimistic prospects, all forum speakers called for stringent regulations to prevent frauds so that a healthy ecosystem could be established.
But the question for the market remains how to balance between supportive moves and tightened scrutiny.
In May, the CBRC released draft regulations for a registration-based system for Internet financial business such as P2P, and banning high-risk products from the finance sector, which was said to launch by the end of June.
But the person who might have been able to expand on the draft rules, Li Junfeng, director-general of the CBRC's Financial Inclusion Affairs Department, didn't turn up for the panel discussion.
Guo of Dianrong.com, however, cautioned that supervising P2P lending the same way as for traditional banking will kill the innovation process.
