China issued a regulation on Wednesday to strengthen its control on expanding peer-to-peer (P2P) market and to prevent the financial risks associated with it. The new guidelines aim to limit the role of P2P lending companies to financial information service intermediaries, as they forbid online lenders from accepting deposits and guaranteeing principal or interest on any loans facilitated by them.
What is more, the regulation sets ceilings for borrowing. An individual is allowed to borrow up to 200,000 yuan (or $30,020) on a single P2P lending platform, and a combined 1 million yuan from platforms. A company, on the other hand, as allowed to seek a loan of up to 1 million yuan on a single platform, and a total of 5 million yuan from multiple platforms.
The regulation was issued jointly by the China Banking Regulatory Commission (CBRC) and three other ministries. In a statement the CBRC said that money changing hands between lenders and borrowers should be managed by banks and P2P companies are not allowed to pool or raise funds.
The P2P market in China has become one of the world’s largest, but it has also created a “gray” market. According to data provided by CBRC, 2,349 P2P platforms were active as of June, which represents an increase of 49.1% from the end of 2014. Besides, 43 % of all platforms (1,778) proved to be troublesome, for instance such pooling funds, lending their own money or being involved in scams.
Such an example is Ezubao, a major P2P platform that made media headlines earlier this year for running a Ponzi scheme. The operator managed to collect 50 billion yuan by luring 900,000 investors with promises of financial products with high returns.
“The CBRC and financial service offices of local governments will divide their regulatory responsibilities and cooperate with each other,” said Li Junfeng, director of the CBRC’s financial inclusion affairs department. “The CBRC will be responsible for making regulations and policies for P2P lending companies, constantly monitoring their business activities, operation and management, while coordinating cross-region regulatory actions. Financial service offices of local governments, on the other hand, will be responsible for the registration of P2P lending companies, their everyday information collection, and risk prevention, control, early warning and disposal”.