Internet financing booms in China amid challenges

Like many small business startups, bespectacled college grad Zhang Shilang had a solid idea but no money to follow through.

With plans to begin a door-to-door optometry service, the 25-year-old Beijinger did what most of the younger generation do to solve problems - he hit the internet.

Roughly 6 months after registering with online crowdfunding site Angelcrunch, Zhang has managed to find several investors for his business, raising more than 600,000 yuan (97,561 U.S. dollars). He expects an additional 1 million yuan from five more investors in the near future.

Internet financing services such as crowdfunding and peer-to-peer (P2P) lending are helping to break the stranglehold state-owned finance once held on those looking to fund a new business.

With the sector growing to include areas of payment, investment and financing, funds and insurance, using the web to conduct daily transactions or finance businesses is slowly becoming a way of life for those in China.

According to a recent report by iiMedia Research, a third-party data mining agency, 61 percent of China's more than 600 million Internet users have used Internet financing products.

"Internet will inevitably penetrate the financial sector as Taobao and WeChat have changed people's habits of shopping and communication,"said Jiang Qiping, secretary general of the Information Research Center at the Chinese Academy of Social Sciences.

And that, he says, is not such a bad thing.

The internet improves the efficiency of capital utilization and lowers trading costs, which injects vitality into economic development and industrial innovation, Jiang said.

In addition to convenience, online wealth management products such as peer-to-peer lending (P2PL) allow users to avoid tight interest rate controls.

Platforms such as PPDAI, China's first P2PL platform, allows site members to invest or borrow without involving major financial institutions.

Interest rates for loans with such services are more fluid, changing depending on the platform and allowing individuals to avoid the strictly set rates by banks.

Qi Dong, an office worker in Beijing, has invested more than 120,000 yuan across three leading P2P platforms, helping individual borrowers in need of money for smaller projects such as house renovation, stock replenishment or a car purchase.

While individuals would usually have trouble getting financing from the bank for such projects, Qi can provide them with the money they need and earn a slightly higher 10 percent interest rate on the loan, compared with the 6 percent basic interest rate set by banks.

By the end of 2013, PPDAI had 2 million registered clients with an accumulated trade volume of 1.6 billion yuan.

With no industry standard or regulations, the P2P industry has experienced wild growth.

By the end of June, there were 1,263 such P2P platforms producing a turnover of about 100 billion yuan in the first half of this year, according to the Internet Society of China.

While the industry may provide benefits, at the same time, the lack of regulation also brings risk to investors, says Li Chao, an analyst with iRearch, an Internet consulting firm.

By the end of July, 150 P2P firms were recorded to have pooled investors' money and fled, according to Wang Yanxiu, an official with the China Banking Regulatory Commission.

At present, information about the P2P and crowdfunding firms have not been included in the central banks' credit reporting system, which provides room for fraud.

Although supervision details are not in place, Li is optimistic the authorities will hold a positive view toward development of Internet financing.

Yi Huanhuan, deputy head of the Beijing-based Hongyuan Securities' research arm, called for the government to be explicit on supervision principles over Internet financing, exerting restrictions on areas including registered capital, lending leverage, reserve ratio and single loan limits.

"It's better to divert rather than to block," said Yi.

"It's just like you never know if a chicken or a dinosaur will come out of an eggshell."

But regardless of outcome, a cage should not be put on the eggshell in advance, he said.

Self-discipline and risk control are key to the long-term survival of Internet financing companies, said Liu Yanfeng, CEO of Anxindeli, a new P2P platform that was launched on July 31.

"Never set up your own capital pool with investors' money or involve in money laundering," said Liu.