One popular investment theme in China has begun to lose its appeal, as Chinese authorities continue with their push to tighten credit and restrict lending through the shadow banking sector. Investors accustomed to double-digit returns by fronting capital to needy borrowers over online lending platforms, are likely to face more challenging times ahead, with analysts saying the yields on these investments are slated to fall into the single digits in the near future. Returns that were as high as 10.96 per cent on average a year ago, have dropped about 1.75 percentage points to 9.21 per cent in May, according to wdzj.com, a website tracking the sector. The drop in investment returns is likely to dampen the attraction to investors, though data shows the sector still managed to attract new sponsors in May. Data shows that the number of active investors inched up 2 per cent in May from a month earlier. Among reasons for the falling returns, online platforms face higher compliance costs and expenses in attracting clients, according to Liu Yafeng, an analyst at Rong360, a financial data provider. “Thinner prospective returns are an inevitable result,” Liu said. Online lending sprouted up in mainland China in the late 2000s as a way to provide credit to those who were underserved by the traditional banking system. Its rapid growth, however, was overshadowed by a spate of high-profile scams where individuals, including some pensioners, were swindled of their life savings, which sparked a regulatory crackdown. In the wake of these scandals, banking watchdog China Banking Regulatory Commission along with other government bodies jointly released a series of measures which formed the first legal framework towards regulating the sector. These stipulate that the platforms act as intermediaries that connect people with financing needs and capabilities. They also require the platforms to work with a registered bank as custodian. Online platforms are expected to comply with the banking custodian requirement no later than August, or face losing their license. The custodian obligation was made to guarantee that investors’ capital was not directly held by the platforms, as a way to help lower the risk of fraud. “The tighter regulatory hand has accelerated an industry reshuffle, leaving big platforms with stepped-up compliance and lower returns dominating the sector and thus pulling down the industry average,” Chen Xiaojun, an analyst at wdzj.com, told the Post. About 66 platforms closed down in May, leaving 2,148 in operation. As of the end of May, outstanding loans via online lending platforms grew to 996.7 billion yuan (US$147 billion), up 4.1 per cent from a month earlier. The tightened scrutiny by regulators since last summer has led to an accelerated consolidation in the sector, with more than 3,700 online lending platforms having closed in recent years.