China to Regulate Internet Finance Activites

BEIJING—China’s government issued guidelines to regulate fast-growing Internet finance, aiming to address risks exposed by the recent stock market turmoil, while pledging to support the sector in directing financing to small businesses and entrepreneurs.

The guidelines, posted on the central bank’s website Saturday, call for closer supervision of the sector. Chiefly, they clarify the division of responsibilities among the welter of regulatory agencies that have at times seemed to have failed to keep pace with the evolution of Internet financing.

“In recent years, China’s Internet finance has developed rapidly, but also exposed some problems and hidden risks,” a central bank official was quoted as saying in a statement on the bank’s website. Such problems included the “lack of thresholds, lack of rules, lack of supervision,” and many instances in which operators fled with their clients’ money, the official said.

Among the arrangements spelled out, the central bank will oversee online payments, the securities regulator will be responsible for crowdfunding and online sales of funds while the banking regulator will supervise platforms that directly link borrowers and lenders known as peer-to-peer lending. Fully 10 government ministries and commissions jointly issued the guidelines.

Coordinating responses across regulators has been a challenge for the government, most recently on display in the handling of the plunging stock markets. Mixed signals from the central bank and China Securities Regulatory Commission undermined shaky investor confidence, contributing to the decline, according to officials and market participants.

One area the new guidelines address is the peer-to-peer, or P2P, lending business, which became a platform for investors using borrowed money to trade stocks, adding to the recent volatility. In trying to stabilize the markets, the government cracked down on such margin financing, prompting several P2P lending platforms to curtail such services for stock investors.

Still, such platforms have helped to counter a long-standing problem in China of a lack of financing for small businesses. The new guidelines stop short of cracking down on P2P firms. Instead, they ban them from “illegal fundraising” and require P2P lenders to entrust funds raised from investors with banks to guard against fraud., one of China’s largest P2P lending platforms, welcomed the new guidelines. “The era of wild growth in Internet finance has ended and a new spring has finally come,” said Liu Yang, the firm’s chief executive officer, in a statement in response to the guidelines. The company was among the first to exit the margin lending business in response to the crackdown.

The guidelines also outlined measures to promote innovation in Internet finance, including boosting cooperation between financial institutions and Internet companies, expanding access to capital, cutting bureaucratic red tape and introducing tax breaks.

China’s e-commerce giant Alibaba Group Holding Ltd., through its financial services affiliate, and social networking and games company Tencent Holdings Ltd. have raced to provide users with access to online money-market funds, payment platforms tied to local services such as restaurants and taxi hailing, and microloans. They have each launched online-only, private banks in recent months aimed at serving individuals and small businesses.

“Internet finance has played a positive role in promoting the growth of small and micro enterprises and expanding employment, opening the doors for mass entrepreneurship and innovation,” the central bank official said in the statement.

The guidelines said the government would encourage qualified financial and Internet firms to provide Internet-based payment, loans, crowdfunding platforms, consumer finance and other services. They said the government will broaden the channels for fundraising for Internet finance firms and will encourage those they deem qualified and “excellent” to list on domestic markets.