Beijing grapples with internet finance industry

China’s watchdogs for securities and banking are scrambling to introduce new rules to better control the booming internet finance industry.

China is attempting to take a firmer grip of its internet finance industry following a proliferation of companies offering services.

Internet finance refers to services including online wealth management, third-party payments, P2P small loans, electronic banking and online crowd funding.

The China Securities Regulatory Commission on Friday said it was co-operating with the country’s other regulators in drafting new rules on the industry due to fears and complaints.

“Some problems and risks exist in the development process of internet finance, which needs regulation and guidance,” said Zhang Xiaojun, a spokesman for the regulator.

The central bank, China Banking Regulatory Commission and China Insurance Regulatory Commission are the other watchdogs that are involved in the rule-making process, according to market observers.

China’s internet finance industry has boomed over the past few years, with a plethora of groups offering services online, which require little real investment or staff.

On Friday, Alibaba Group, the country’s largest e-commerce company, diversified its online financial services by launching wealth management products. 

Alipay, Alibaba Group’s online-payment affiliate, said it would offer investors Rmb5800 million one-year products with an expected annualized return of 2.5%-7%, while their principal will be guaranteed. The product was sold out in three minutes by more than 2 million users, according to Alipay.

On the same day, Tencent released Ding Tou Bao, an ETF tracking an A-share equity index created by Tencent, which has a historical absolute yield of 15.9% as of December 31.

In June, Alibaba issued Yu’E Bao, a money-market fund offering investors a return of 6%-7%, compared to traditional banks’ one-year deposit rate of 3%-4%. No extra fee, no entry limitation and high efficiency are other key reasons such products are popular.

The fund size of Yu’E Bao was Rmb185.3 billion as of end-January from Rmb10 billion at launch in June, according to Howbuy, a domestic wealth management company., Tencent and a few other smaller internet companies followed Alibaba in launching similar products.

However, problems have surfaced, posing new challenges for regulators.

For example, some investors argue that the products offered by internet finance groups merely suggest an annualized return of 7% or even 8%, without further explanation on whether the return is an expected or guaranteed one.

Also, the products often use a marketing slogan such as “investing with zero risk” when in fact they are still financial products and of course have risks — possibly even higher risks due to the nascent status of the industry.

Another difficulty for regulators is how to category the internet companies. “Whether the internet companies count financial institutions or not and who will be the responsible regulator to oversee them, still remain questionable,” said a Beijing-based lawyer with a large law firm who declined to be named because the comments may relate to specific companies.

Most internet companies launched their financial products with promised returns. However, according to the Securities Law, financial institutions can’t make commitments to clients’ return or loss in securities trades, according to the lawyer.

Also, there have been at least 10 cases where employees of micro-loan companies deceived clients or ran away when they found difficulties in repayment, according to local media.

Shang Fulin, president of CBRC, in August said the regulator should restrict lending from banks to unregulated micro-loan companies, underlining the potential risks such internet services would bring to the overall financial system.

“Till now we haven’t seen the internet finance products specialise their risks and make a framework in risk-control; regulators may be in need to fill the gap,” said Lian Ping, chief economist with Bank of Communications. 

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