Regulators struggle with fast-evolving Internet firms
Experts said that the supervision of Internet finance companies such as peer-to-peer (P2P) online lending platforms poses a challenge for China's regulators, with the central bank governor having specified potential risks from cross-region shadow banking and illegal financial activity as a current issue.
In an article posted on Saturday on the website of the People's Bank of China (PBOC), Zhou Xiaochuan, PBOC governor, summarized the financial risks that China is facing. The PBOC is China's central bank.
Zhou noted that some Internet finance companies conduct Ponzi schemes in the name of inclusive finance and raise funds illegally via online and off-line channels.
These actions are prone to prompt cross-regional protests by small investors. Some "financial crocodiles" also conspire with irresponsible regulators to make a profit, said Zhou.
The article, which was posted on the PBOC website as a top story, was excerpted from supplementary reading materials to help officials master the ideas of the 19th National Congress of the Communist Party of China held in Beijing from October 18 to 24.
Speaking broadly, Zhou emphasized risk prevention measures involving "black swans" and "gray rhinos" as China's financial sector enters an era where risks are burgeoning, due to the development stage of the industry itself and a mix of domestic and foreign factors.
Xi Junyang, a finance professor at the Shanghai University of Finance and Economics, told the Global Times on Sunday that the Internet finance sector is proving to be a hard nut to crack for regulators, partly because it is an emerging industry that is constantly evolving, causing regulations to lag behind.
"Some Internet finance firms look sound right now, but their models may give rise to risks later. Regulators must walk a fine line between avoiding excessive harshness that might stifle innovation and being too lenient, therefore causing problems," Xi said.
Compared with traditional financial institutions, these Internet companies are weak in recognizing and preventing risks, and how to instill such awareness is a big issue for regulators, noted Xi.
"On top of this, there are deliberate violations of regulations and laws for the sake of profit and how to erect a safety network to contain risks rising from such actions also tests the ability of the regulators," Xi said.
For example, two Internet finance companies based in Xiamen, East China's Fujian Province, conducted a Ponzi scheme that ensnared about 8,000 small investors in a mere six months under the guise of inclusive finance, according to domestic news site taihainet.com in May.
Investors were promised to get 109 percent of what they invested back every three days, but the scheme went bust in mid-March and all of the investors' money was lost, according to the local people's procuratorate.
Dong Dengxin, director of the Finance and Securities Institute at Wuhan University of Science and Technology, told the Global Times on Sunday that inclusive financing can be offered by traditional, properly licensed financial institutions and also by newcomers attracted by the very low barriers to entry and the absence of licensing requirements.
Dong noted that inclusive financing is very "grass-roots."
"A few partners can set up a P2P firm or companies can set up P2P firms. The fact that several P2P firms went public increased people's appetite to set up such firms," Dong explained.
However, some firms have built up capital pools or taken an active part in raising and then lending funds, both of which are banned, rather than acting as lawful intermediaries, Dong noted.
Internet-based lending grew fast in 2016. There were 51.09 million people involved in lending and borrowing, up almost 36 million compared with 2015. Besides, the increase of borrowers far outnumbered the lenders, according to media reports.
Dong said the regulation strategy is to encourage innovation in the sector and be "inclusive."
"To be inclusive and to be effective at the same time can be a difficult thing to master," Dong noted.
The cost of supervision for regulators is high under the inclusive regulation model, he added.
Besides, Dong noted that the market needs more mature investors who know how to guard against financial fraud.
"They sue first, after which regulators intervene. This is the only plausible way to supervise the new market. However, this takes time," Dong said.
"Investors need to take responsibility for their own decisions," he added.
