BEIJING - China's banking regulator issued tough new rules on Wednesday to tighten regulation of the country's US$60 billion peer-to-peer lending sector, which has been dogged by scandals and fraud.
The measures mark the latest attempt by China to reduce risks to the world's second-largest economy by cleaning up the its rapidly growing but loosely regulated online financial sector.
Peer-to-peer lending (P2P) platforms will not be able to take deposits, or provide any form of guarantee for lenders, according to a joint document issued by the China Banking Regulatory Commission (CBRC), Ministry of Public Security, Cyberspace Administration of China, and the Ministry of Industry and Information Technology.
The regulator said some P2P firms were running Ponzi schemes and raising funds illegally, and said it would bar firms from 13 "forbidden" activities.
Under the new rules, P2P firms would not be permitted to sell wealth management products which are popular with many Chinese investors, or to issue asset-backed securities, and must use third party banks as custodians of investor funds, the regulator said.
It added that P2P firms cannot guarantee investment returns or investment principal, and they would be subjected to higher disclosure requirements.
The regulations follow the April passage of a plan by the State Council, or cabinet, to clean up the non-bank financial sector after rare demonstrations by angry investors stoked fears of social unrest.
The banking regulator is responsible for tightening regulations over P2P, online trust businesses and online consumer finance firms
China's online P2P lending platforms, which match small business and individual borrowers with retail investors with spare funds, has seen rapid growth in the past two years largely due to the lack of regulatory oversight.
The industry raised more than 400 billion yuan ($60 billion)by November last year, CBRC data showed.
But among the more than 3,600 P2P platforms, more than 1,000 were problematic, the CBRC had said.
The rise of P2P lending was originally seen by the government as a type of financial innovation that could make funds accessible to credit-hungry consumers and small businesses, which continue to struggle to get loans from traditional financial institutions.
Beijing's hands-off approach to promote the rapid development of the sector, however, led to a large number of high-profile P2P failures, scandals and frauds.
The consequences have devastated many retail investors, who dumped their life-savings into P2P platforms in hopes of receiving double-digit returns, threatening China's social and financial stability.
Ezubao, once China's biggest P2P lending platform, turned out to be a Ponzi scheme that solicited 50 billion yuan ($7.5 billion) in less than two years from more than 900,000 retail investors through savvy marketing.
Investor funds were squandered by Ezubao executives on lavish lifestyles. Retail investors are still unable to get back their hard-earned money, and many have blamed Beijing for its lack of regulation and scrutiny.