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World Internet Conference 2015

Reform of China’s booming internet financial services comes as fraud cases highlight lack of efficient industry regulation

Influence of internet on global business will come under focus at this week’s three-day World Internet Conference in mainland’s Zhejiang province, which opened on Wednesday

PUBLISHED : Wednesday, 16 December, 2015, 12:32pm
UPDATED : Thursday, 17 December, 2015, 1:03am

China’s plans to modernise its financial services have come at a time when the mainland’s internet finance industry is booming, but regulators are also facing challenges following recent cases of fraud.

The influence of the internet on global business will be come under the focus of this week’s three-day World Internet Conference, attended by many senior technology company executives, in Zhejiang province, which opened on Wednesday.

Internet technology professionals on the mainland have shown their adeptness at creating new business finance methods to cater to consumers.

Numerous mainland online companies have been launched since 2013 in areas such as peer-to-peer (P2P) lending, crowdfunding, microfinance, and wealth management businesses. Before then the mainland’s finance sector was dominated by state-owned institutions.

Mainland P2P lending, in particular, has grown rapidly over the past two years with at least 2,000 firms aggressively expanding their online businesses to cater to the growing demand among both lenders and borrowers.

Read more: China’s internet finance sector challenges state-owned banks

Online payment services, which have also been growing in prominence since 2013, have also been well received by the mainland online community.

Yet this transformation has come just as Beijing started to try to reform the financial system, which had long been criticised for focusing only on state-controlled enterprises, and being biased against smaller business.

Earlier this month it was reported that Chinese authorities have frozen 1.1 billion yuan (HK$1.3 billion) in funds deposited in Citic Bank by P2P online financing platform Ezubo as part of an investigation into alleged violations of banking norms and illegal fundraising.

Ezubo is one of the bigger peer-to-peer lenders, with an investor base of 840,000 involving 71 billion yuan of funds sourced online from across the country.

Ding Ning, chairman of Ezubo, had been taken into police custody, while inquiries had been launched on the firm’s operation in Beijing, Shanghai, Anhui and Guangdong, Chinese media outlet Caixin reported.

Read more: China’s traditional lenders meet their match in internet banking

“Internet finance is currently playing a complementary role in the finance industry, with some of the existing financial services conducted on the internet,” said Qiu Jianfeng, chairman of the online P2P company Jyc99.com.

“However, there is vast untapped potential because it is expected that financial services offered on the mainland through the internet will eventually replace the existing financial system of serving clients.”

Li Yang, vice-president of Beijing’s Chinese Academy of Social Sciences, estimated that about 490 million mainlanders – 72 per cent of the country’s internet population – have used online financial services up to now.

Most online financial businesses use online payment systems, Li said.

It has been estimated that the online financial services industry in China will record total sales of 800 billion yuan (HK$960 billion) this year, with that figure likely to surpass 1 trillion yuan market in 2016.

One bullish forecast suggests that the market size of internet finance on the mainland will be valued at up to 10 trillion yuan during the next five to 10 years.

China’s Premier Li Keqiang has been keen to promote the use of internet to spur a further economic growth amid China’s current slowdown.

In March, he proposed the Internet Plus strategy, which encourages mainland businesses to link IT technologies, including cloud computing and big data, with their existing business methods as a way to enhance efficiency in commerce and manufacturing.

Beijing is also striving to widen small mainland companies’ access to funds.

The P2P sector, which has helped online consumers to obtain loans more easily, is a result of China’s efforts to liberalise its interest-rate setting mechanism.

Currently, P2P lending accounts for only a small part of the mainland’s total loan businesses. Despite soaring growth, which has seen the volume of P2P lending top several hundred billion yuan, it still lags far behind the credit line granted by mainland banks totalling more than 10 trillion yuan.

A new regulatory framework is still in the works after Beijing published a guideline governing the development of internet finance in July.

However,the number of widely publicised frauds and business failures in recent months have highlighted the lack of efficient regulatory oversight.

In the guideline, the State Council said it would adopt a go-slow approach towards developing internet finance while making risk-control the main priority.