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China is cracking down on peer-to-peer lending

Photo by ChinaFotoPress/Getty Images

China’s banking regulator, the CBRC, announced yesterday that they will place tougher restrictions on thousands of online peer-to-peer (P2P) lenders operating in the country, stating that firms will not be allowed to take deposits from the public, pool investors’ money or guarantee returns.

According to a report from Bloomberg, citing a draft ruling released on Monday, the CBRC stated that they will “cleanse the market” and attempt to reduce fraudulent activity and failures that have plagued the burgeoning industry in recent years.

According to the CBRC, of the more than 3,500 online lending platforms operating in the country as at the end of November, 1,000 were classified as “problematic”.

The CBRC states that peer-to-peer lending firms should act solely as intermediaries between borrowers and lenders, rather than raising money themselves through pooled investments to be lent to borrowers.

The ruling effectively bans P2P lenders from offering wealth-management products to investors — those with interest rates often significantly higher than benchmark bank deposit rates — which some hoped would diversify their revenue sources.

Crucially, firms will need to register with local financial regulators and will not be able to lend to borrowers who want to raise money to invest in the stock market.

“Many online lenders have strayed from the role of information intermediary,” the CBRC statement read.

The ruling had an immediate impact on Chinese stocks with most mainland bourses recording falls in excess of 2% on Monday. The benchmark Shanghai Composite index slid by 2.6%, the steepest one-day decline recorded since November 27 this year.

In the year to June 2015, the index rose by over 150% as investors — often using significant levels of leverage — looked to capitalise on continued market gains.

Over the next two months, the index slumped by over 40% as lofty company valuations and excessive levels of leverage saw investors rush to sell down in an attempt to limit mounting losses.

The market rout saw trillions of dollars wiped off the value of Chinese stocks and lead to the government introducing a series of unprecedented measures to limit further market losses.

While stocks have since moved modestly higher — adding more than 20% since late August — the CBRC proposal suggests the government is looking to reduce the risk of another credit-led boom-bust cycle forming in the nation’s stock market in the period ahead.

Trade in Chinese stocks will resume at 12.30pm AEDT.

You can read more here.

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