20 August 2019
Some netizens are accusing the central bank of going back on its word to promote financial innovation. Photo: Reuters
Some netizens are accusing the central bank of going back on its word to promote financial innovation. Photo: Reuters

How regulatory changes could tighten noose on P2P lending

China’s central bank is only days into a crackdown on third-party payment services, but already, the two biggest operators are saying the tighter regulations will not affect subscription and redemption of internet funds.

Alibaba and Tencent, which operate Yu’E Bao and Licaitong online funds, respectively, are simply trying to put jittery investors at ease.

This follows the release of two documents, one seeking tighter regulation of the online payment business, the other proposing draft guidelines on the development of mobile phone payment services.

The latter solicits public opinions on proposed limits to online money transfers.

The Hong Kong Economic Journal’s EJ Tactics looks beyond the challenges faced by the likes of Alibaba and Tencent and examines the potentially devastating impact of these developments on peer-to-peer (P2P) lending, another relatively nascent industry. 

P2P allows unrelated individuals to lend to one another without going through traditional channels such as banks and financial institutions. The transactions are conducted online through a service provider.

The draft regulations prohibit payment companies from opening accounts for non-financial institutions that engage in financing, wealth management, underwriting and currency exchange, among others.

This effectively shuts the door on P2P operators which mainly rely on online payment to let customers top up or withdraw funds.

More than 90 percent of P2P companies prefer to partner with payment service providers and only a few will work with banks, online lending website says. Banks typically are reluctant to do business with P2P providers because their operating model is considered too risky and the banks’ potential share of returns too thin.

Still, the China Association of Microfinance says P2P operators should cooperate with banks or explore viable alternatives.

Deposits in the banking system fell sharply in 2013 thanks to the rise of online wealth management products that have been attracting a growing number of investors.

The proposed regulations are intended to ease pressure on bank deposits.

Some netizens are disappointed.

They are accusing the central bank of reneging on its promise to promote financial innovation and of using its influence to protect state-owned banks and China UnionPay, the country’s only bank card consortium.

One netizen complained in a blog post: “Who puts lenders’ oligopoly interest at stake? Who will be targeted by the central bank? Sigh, when will such deprivation end?”

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Freelance journalist

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