Regulation of peer-to-peer lending a welcome move for financial stability

The new rules need to be matched however with measures to make funding more available through official channels

PUBLISHED : Sunday, 28 August, 2016, 1:19am
UPDATED : Sunday, 28 August, 2016, 1:19am

The mainland banking regulator’s move to rein in peer-to-peer lending, known as the shadow banking system, and defuse a threat to the financial system is long overdue. High-profile scams and collapses have rung warning bells, with experts warning that without closer supervision, P2P lending could become a time bomb. It is therefore good for the health of the system that the China Banking Regulatory Commission has announced new rules imposing caps on individual and company borrowing per platform and overall.

That said, it would be good for an economy battling headwinds if the government also signalled practical recognition of the reality that traditional, conventional banks and finance channels are no longer adequate to finance China’s new economy, particularly demand from the private sector. After all, it is only because of such otherwise unsatisfied demand that P2P financing has become rampant, forcing the authorities to step in.

China imposes cap on peer-to-peer loans to rein in runaway ‘shadow banking’ scams

Under the new rules, individuals will be restricted to borrowing a maximum of 200,000 yuan (HK$233,010) each from any one P2P platform, and to a total of 1 million yuan from any number of them. For companies the caps are set at 1 million yuan and 5 million respectively. Other rules require a licence for making loans against equity and bridging loans, ban the taking of deposits or provision guarantees for lenders, and stipulate third-party banks as custodians of investor funds.There is no question it is the right move but the authorities risk collateral damage to the new economy unless they provide accessible, affordable funding through the official financial system.

In that respect, the new rules highlight debate about the need for a single financial watchdog or super regulator where five now watch over different areas. They need to coordinate their efforts. A super watchdog could better administer regulation and devise a better legal framework for the stable growth of innovation such as P2P lending. Meanwhile, the year allowed for compliance with the new rules is expected to see a shakeout among P2P lenders.