By Dong Ximiao Source: Global Times Published: 2017-11-29
Uncertainties in overseas markets may affect China
A number of Chinese peer-to-peer (P2P) lending companies went public in the US this year. Those P2P firms have been growing quickly, with some venturing into high-risk segments such as campus loans and cash advances. As they go public overseas, it creates potential risks that may eventually affect China`s financial stability. Supervision is needed to bring the P2P lending sector in order.
That these companies listed in the US reflects several factors. One main reason is the companies are expanding. Most are underperforming, and some are in the red. US stock exchanges do not have strict requirements for indicators such as net profit and cash flow. Also, the US market attracts investors from all over the world, easily raising more funds.
Avoiding anticipated domestic regulations is another motivation for the P2P companies to list abroad. In July 2015, China`s central bank and related departments released a guideline to promote the sound development of Internet finance. But everything is still in the process of rectification, inspection and assessment. The China Banking Regulatory Commission and three other departments have formulated interim measures to strengthen the management and supervision of online lending companies that act as information intermediaries with three guidelines covering capital depositories, information disclosure and filing registration. But work on the final regulation has not yet officially started.
Although the P2P companies are referred as Internet finance companies, they are not licensed financial institutions. They are treated as regular companies instead of financial institutions, which have to pass stringent checks in China before going public overseas. It means P2P companies are free from domestic constraints, and their only regulators are US agencies.
However, overseas markets are full of uncertainties. It is difficult for the Chinese P2P companies to obtain high valuations. The companies often must contend with regulations of the exchanges` host countries. New York-based law firm Faruqi & Faruqi has launched an investigation into the online lender Qudian amid doubts about its business practices. US investors can potentially sue the company as well.
If Internet lending companies encounter problems on overseas markets, the impact can be transmitted to China, thus endangering the interests of Chinese investors and consumers. Even though they listed in the US, their main business is still in China. The business operations will be interrupted by possible prosecution or bankruptcy in the US. The protection of the interests of Chinese investors and consumers will be a problem.
Without a clear understanding of the rules, regulatory environment and development environment of the US market, listing overseas may have negative effects. China may consider appropriately reviewing overseas listings. For companies that are already listed, the overseas market will enable them to expand, which can lead to even higher risks if there is inadequate supervision.
So tougher regulations are needed. Thorough supervision should apply to the whole financial sector. It is necessary to intensify the rectification efforts and reject the filings and registration of corporations that break the rules. Joint efforts should be made with law enforcement departments to investigate lending platforms that appear to be pushing the boundaries of laws and regulations.
With the strengthening of supervision, P2P lending industry will find that "good money drives out bad." That will be positive for two categories of companies: those operating in compliance with the regulations and those that function as platforms providing data for financial institutions.
With the rapid development of technologies such as the Internet and artificial intelligence, finance and technology are becoming deeply integrated, while anti-fraud technologies are maturing and being widely applied. But this situation doesn`t apply to most of China`s Internet finance companies. On the one hand, due to relaxed supervision in recent years, there is room for regulatory arbitrage. On the other hand, because of a weak credit system, credit databases are flawed.
Financial regulators should improve the financial infrastructure while implementing "stringent supervision." A personal credit database should be built to include individual credit data that the central bank`s credit information system omits. A national-level database should be established to share industry information and reduce risks.
The author is a senior fellow with the Chongyang Institute for Financial Studies at Renmin University of China.