Throwing the baby out with the bathwater – the predicament facing China’s online financial start-ups

PUBLISHED : Friday, 13 May, 2016, 6:01pm
UPDATED : Friday, 13 May, 2016, 6:01pm

Start-up founders in China’s internet finance circles are trapped, as they find their businesses suddenly deemed “illegal” or “improper” after authorities abruptly changed the regulatory tone early this year.

One year after Premier Li Keqiang called for “mass entrepreneurship and innovation” in his Government Work Report, thousands of new entrepreneurs are retreating from what was once the most sought-after segment of the finance industry.

Xie Ling, founder of Pinfangwang.com, a crowd funding platform targeting housing investment in Shenzhen, said her company’s business has been suspended since late March when it received an order from the municipal government. The company is waiting for new guidelines from the central and local governments.

Xie quit her job as a financial risk control professional last year and established Pinfangwang.com with her partners. As an online platform, Pinfangwang raised money from clients to purchase houses, and planned to share the income after taking profits from future sales.

After operating for six months since last October, the platform had raised around 80 million yuan (HK$95.25 million) and had purchased 6 to 7 apartments, before the business model was put on hold by Shenzhen authorities.

“They are throwing out the baby with the bath water,” said Zhang Guodong, secretary general of the Shenzhen Internet Financial Association.

“Clearly regulation has been lagging behind the development of the emerging internet finance industry. That’s normal. But the current solution seems too simplified,” he said.

Starting from April, authorities suspended registration for new companies involved in P2P lending, crowd funding, and online payment businesses.

Meanwhile, a top-down national campaign is unfolding under the leadership of the People’s Bank of China. Police, industry and commerce authorities are scrutinising companies in the sector.

Vivian Wei, who closed an online derivative sales platform last month, said, “When the central government loves the idea of internet finance, every government organ opens its door for you. When they hate it, everyone is looking to give you trouble.”

China’s internet finance sector first started forming as early as 2011, as industry insiders began using online platforms to promote sales of finance products, or facilitate matchmaking of borrowing and lending.

In 2014, the eye-catching initial public offering of US peer Lending Club marked the first online lending platform sought after by the capital markets, and fuelled passion among similar start-ups in China.

Also, after Premier Li Keqiang said a major task was to “promote the healthy development of internet finance” when delivering the annual government work guidelines in March 2014, the number of P2P companies in China soared to 1,575 by the end of that year, up from 800 by the end of 2013.

The industry took another great leap in 2015, after Premier Li in May visited Beijing’s Zhongguancun Entrepreneurship Street, a start-up hub, and chatted with fintech entrepreneurs.

It seems government departments are still passing the buck to each other in terms of supervising this sector
Zhang Guodong, Shenzhen Internet Financial Association

However, the regulatory tone quickly switched from “tolerate” to “rectify” this year following the uncovering of large scale fraud in the sector, said senior lawyer Liu Pingfan, with Guangdong Ji Tang Law Firm.

Zhang of the internet financial association said, “A comprehensive industry guideline is still missing, while it seems government departments are still passing the buck to each other in terms of supervising this sector. So industry insiders have to some how speculate on the bottom line of the authorities based on the ongoing rectification, and some have left the industry as they feel the favourable policy environment is gone.”

Added Xie, “We are now looking for a business transition, but frankly speaking we are confused as the boundaries look ambiguous. Government officials have told us to wait for formal industry guidelines. Hopefully, this will come out quickly, and hopefully we will find a regulator to oversee us.”

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