Nation to crack down on illegal P2P lending

China will crack down on illegal fundraising activities involving wealth management products offered by peer-to-peer (P2P) lending websites, according to a press conference held by China's banking regulator on Monday.

This kind of financial scam is rampant in central and eastern regions of China, said Liu Zhangjun, head of the Office of the Joint Ministerial Conference Against Illegal Fundraising, at the press conference.

The State Council in 2007 approved the formation of the joint ministerial conference, chaired by the China Banking Regulatory Commission (CBRC).

"With the fast development of Internet financing, there have been P2P lending websites involved in illegal fundraising activities, leading to heavy losses for investors," Liu said.

P2P lending platforms that are engaged in fund pooling instead of matching specific borrowers and lenders, or allowing borrowers to disperse false information will be defined as illegal fundraisers, according to Liu.

The joint ministerial conference is also pushing local governments to establish a monitoring system to identify online and off-line illegal fundraising to prevent it from developing into a more serious problem, Liu said.

As a new financial service amid tighter credit conditions in recent years, P2P lending has seen exponential growth in China since 2006.

It works by channeling money from investors to borrowers directly through websites.

The number of P2P lending platforms in China grew from nine in 2009 to about 800 by the end of 2013, with total lending of 100 billion yuan ($16 billion), according to the Internet Finance Report 2014 released at the Boao Forum for Asia on April 9.

In response to the rapid development of Internet financing, the CBRC has initiated research into the future regulation of P2P lending, Yan Qingmin, vice chairman of the CBRC, said at the Boao Forum.

Many investors fall prey to financial scams, partly because they offer high-yield investment products, Chen Ming, an IT professional and investor in P2P lending, told the Global Times Monday.

"I am very cautious in selecting P2P websites," he said.

Chen currently has about 30,000 yuan invested in a P2P lending website, for an annualized interest rate of 11 to 13 percent, much higher than the 3.25 percent one-year bank deposit rate and double the average rate of various wealth management products.

As for the tightened supervision, Chen said he hopes that the regulators will not shut down the overall P2P industry, as it offers individual investors a good option for higher investment returns.

A lack of regulation of the P2P industry is the major cause of the numerous illegal fundraising activities in the market, Li Xinhe, CEO of Beijing-based P2P lending website renrendai.com, told the Global Times on Monday.

"Regulating the industry will be of benefit for it in the long run," Li said.

Li suggested there should be basic requirements for access to the P2P market, such as data transparency, online system security, and risk control standards.

Media reports last week said three P2P lending websites, including Zhe-jiang-based Zhongbao Corporation and Shenzhen-based QHCT, were being investigated for financial fraud.

A total of 27 P2P websites with 600 million yuan-worth of investment have been closed so far this year, either for fraud or failures in risk control, and more P2P lending websites are expected to be shut down this year, Xu Hongwei, founder of P2P lending consultancy wangdaizhijia.com, told the Global Times on Monday.

China has increased curbs against financial crimes in recent years.

In July 2013, Zeng Chengjie, a Hunan-based real estate developer, was executed for illegal fundraising activities and financial fraud. He allegedly defrauded more than 57,000 investors out of 2.8 billion yuan, of which only 1.7 billion yuan was returned.