China's unchecked P2P lending faces tough days

China's P2P (peer-to-peer) lending has been hit with some strict regulations to clean up the business after a string of frauds and defaults.

P2P lending platforms have sprung up all over the Internet and loans are mounting, but some of these platforms are involved in illegal fundraising or have had trouble servicing payments, said Liu Zhangjun, director-general of the Interagency Illegal Funds Taskforce.

The business in China has no thresholds, standards or regulations making illegal borrowing easy, and in many cases economic crimes are systemic.

Han Hao, in charge of economic crime investigations with the Ministry of Public Security, said P2P lending is a typical front for illegal fundraising, a crime that can lead to years, or even life, in prison. To deal with these problems, the China Banking Regulatory Commission will lead a campaign to regulate P2P lending. "The work has already begun," Liu said.

In response to the government's tougher stance, China's largest search engine Baidu announced this week that it would clean up P2P lending platforms on its website, a major marketing channel for many of them.

The announcement came after a P2P lending platform Wangwangdai, which sold financial products on Baidu, simply disappeared this month with a huge amount of money raised from individual investors.

Wangwangdai is not alone. There are dozens of platforms allegedly involved in illegal activities and are being investigated.

The disappearance of Wangwangdai brought Baidu into the firing line as many investors blamed it for a lack of care before recommendation.

"Baidu will adopt stricter rules and screen P2P platforms before recommending them on our website," said the search engine, which has removed links to some 800 P2P platforms from its recommendation list.

Introduced to China in 2006, P2P lending is a practice of lending money to unrelated individuals that bypasses traditional financial intermediaries. In most cases, such loans are unsecured personal ones, and borrowers do not provide collateral against default.

P2P lending, which boasts much higher returns than bank deposits, is very appealing to ordinary Chinese whose investment channels are quite limited. In 2013 transactions through such platforms stood at 106 billion yuan (17 billion U.S. dollars), but over 70 platforms had difficulties in repayments or disapeared in 2013.

China generally encouraged the development of P2P lending but the role of a platform must be confined to just an intermediary, said Liu. These platforms are supposed to live by brokering agreement between borrowers and lenders, and are prohibited from pooling investors' money to fund their own projects.

Facing tighter regulations, P2P lending has shown signs of cooling down and interest rates on many platforms are in a decline, at 21 percent in March, down from 24 percent in the same period last year.