When introduced to a long list of wealth management products they have never heard of, many individual investors, such as retirees, have ended up as victims of unscrupulous online finance platforms, sometimes losing their life savings.
Chinese Premier Li Keqiang earlier this month cautioned that the country's financial sector was vulnerable to risks such as bad assets, bond defaults, shadow banking and Internet finance, with frequent illegal and corrupt activities.
Risk caused by the Internet finance industry has wide repercussions. Some P2P lending platforms resembled hybrid financial institutions providing clients with various financial services online, analysts said.
"Some online finance entities have performed illegal services, which creates contagion risk for banks, as financial agencies are intertwined with one another," said Ou Minggang, director of the International Finance Research Center at China Foreign Affairs University.
SUPERVISION TO CATCH UP
"Before 2017, the industry was full of fraud, such as problematic P2P lending platforms and fraudulent borrowers using false information. With strengthened and coordinated supervision among different regulators, the industry will embrace reasonable development," Wang said.
Wang found that some important industry regulations such as those on crowd funding took effect in 2014, and targeted regulations have been rolled out by national and local authorities since 2016 for some murky and less-regulated areas.
Regulations on Internet finance services such as third-party payment are relatively sound, but regulations in other areas need to be improved, said PBOC deputy governor Pan Gongsheng.
"The pace of business innovation has outpaced supervision in recent years, with companies producing new financial products to bypass supervision and hurt investors' interests," Ou stressed.
"Regulators face a steep learning curve, and they must keep abreast of the ever-changing industry landscape. They should focus on Internet finance companies' business and what their financial products really mean for investors," Ou added.
Businesses such as P2P lending, Internet-based insurance, third-party online payment, and online asset management were among key areas for strengthened supervision, industry observers said.
Internet finance last week appeared on the top banking regulator's list of ten most important areas for enhanced risk control, with targeted measures to be taken to stem emergence of a financial crisis.
For P2P lending alone, regulators have unveiled specific policies including 13 restrictions to prohibit P2P platforms from accepting public deposits, pooling investors' money for their own projects, providing guarantees for lenders, or selling financial products.
Wang also suggested learning from the experience of advanced economies and strengthening efforts to establish a social credit system with participation by both regulators and credit scoring companies.
Better consumer protection laws and regulations should be in place, and supervision of products from Internet finance companies must be strengthened, with better conflict resolution schemes to be established, Li suggested.
Wang said 2017 will be a watershed year for Chinese Internet finance as the rules are tightened, bringing the industry out of the wilderness.
