A draft regulation, released on Monday and open for public opinion until Jan. 27, will tighten supervision on China's booming peer-to-peer (P2P) lending industry, according to analysts and insiders.
The draft imposes 12 restrictions on P2P platforms, prohibiting them from accepting public deposits, pooling investors' money to fund their own projects, or providing any kind of guarantee for lenders.
P2P lending, which is done without a traditional financial intermediary such as a bank, has seen rapid development since China's first P2P platform, ppdai.com, was launched in Shanghai in 2007. With investors attracted by the higher returns offered by the service compared with bank deposits, and small businesses finding it easier to secure loans.
The lack of supervision, however, has made the industry risky for investors as some P2P platforms have been implicated in shady fund raising.
Some operators have been accused of false advertising or illegally absorbing public deposits, while those that have gone bust have left investors out of pocket.
"I welcome the new rules. I feel more secure with my investment," said a website editor, identified only as Wang, from Beijing. He has invested in the leading P2P lending platforms for two years.
"Supervision is a good thing, although I expect my returns will fall given the increase of costs," he said.
At the end of November, there were 2,612 P2P lending platforms in normal operation and 1,157 others with problems, according to statistics released by the wdzj.com, a website focusing on P2P lending research.
"Many P2P platforms do illegal fund raising under the guise of 'financing innovation,' which has had a bad impact on the industry," said Shi Pengfeng, CEO of the website.
"The draft clarifies what kind of business P2P lending firms can undertake," he said.
Under the draft rule, P2P platforms should deposit investors' money with banking institutions and they are now banned from selling financial products or equity-based crowd-funding.
The rule will return P2P lending entities to their core business and really support the real economy, said Shi.
P2P lending platforms, the draft states, must disclose basic information about borrowers and financing projects to lenders, and their website must include information on the number and volume of transactions and bad lending rate.
Following the implementation of the new rules, some small P2P platforms with poor risk control abilities will exit, said Zhang Jun, CEO of ppdai.com.
According to Zhang, the draft rule adopts a negative list supervision model, which bars certain people and institutions from engaging in P2P lending, while allows room for the industry to grow.
P2P lending platforms should not promise to secure the principal and interest for lenders. This will make investors more rational, he said.
The rule also demands that the names of P2P companies contain words relating to the product that they are engaged in, to highlight the nature of their business.
The public opinion period gives P2P platforms a grace period of 18 months to rectify their business after the regulation takes effect.