BEIJING • China's bid to tame its peer-to-peer (P2P) lending sector could cost smaller platforms some business, but the impact on larger players will be limited, and some of the new restrictions will be hard to enforce, analysts and industry players said.
Regulators unveiled a series of measures on Wednesday to head off signs of rising risks in its fast-growing P2P market, including borrowing limits and forcing P2P platforms to use third-party banks as custodians of investor funds.
The US$93 billion (S$126 billion) P2P lending sector has been a source of funds for individuals and small businesses overlooked by the country's traditional financial services institutions that prefer big borrowers with better credit history and collateral.
Total value of China's peer-to-peer lending sector.
The volume of P2P loans surged to 656.8 billion yuan (S$133.5 billion) at the end of last month, from just 30.9 billion yuan in January 2014.
China's P2P and online finance industry has boomed in recent years, but Beijing's hands-off approach to promote the sector as a form of financial innovation has led to a rash of high-profile failures, scandals and frauds.
The regulator's Wednesday announcement knocked 22 per cent off the New York-listed shares of Chinese P2P lender Yirendai overnight, while Chinese stocks fell to a two-week low yesterday, weighed by banking shares on concerns over the crackdown on riskier lending practices.
But many larger P2P companies, including Lufax, Yirendai, PPDAI and Dianrong.com, say they already comply with many of the new requirements, and so could benefit from the restrictions.
"Before the rules were released, people didn't have judgment on which platform is good, but now they can understand it. Investors will definitely withdraw money from the platforms which are violating the rules," said Mr Cliff Zhang, chief executive of China's oldest P2P lender PPDAI.
The volume of P2P loans surged by more than 20 times to 656.8 billion yuan (S$133.4 billion) at the end of July from just 30.9 billion yuan in January 2014, according to industry data provider Wangdaizhijia.
Some P2P firms were found to be running Ponzi schemes and raising funds illegally, said the China Banking Regulatory Commission (CBRC), which jointly released a new set of regulations with three other government bodies to tame the unruly sector.
The regulations, issued by the CBRC, Ministry of Public Security, Cyberspace Administration of China, and the Ministry of Industry and Information Technology, follow the passage of a plan by the State Council, or Cabinet, four months ago to clean up the online finance sector.
Under the new rules, P2P firms cannot sell wealth management products nor issue asset-backed securities, and must use third-party banks as custodians of investor funds. P2P platforms will also not be able to take deposits.
The regulator also set a ceiling for borrowers to control the size of loans on P2P platforms, said Mr Li Junfeng, director of the Inclusive Finance Department at the CBRC.
Industry officials said borrowers and lenders were in any case likely to find ways around the caps.
Mr Simon Loong, founder and CEO of WeLab, which operates a P2P platform in Hong Kong and Chinese mobile lending platform Wolaidai, said: "If you look at how China's Internet market has worked historically, people will always find a way... People try to adapt their business model, find a way to survive with the customer base or information data they've already collected."