In the development of the internet applications in China, internet finance might be the most rapidly developed one; at the same time it is also part of the financial sector being exposed to risks the most. Recently, Pan Gongsheng, deputy governor of the People's Bank of China, said that it would take another one to two years to complete the special rectification of internet financial risks, and establish an initial regulatory system that adapts to the characteristics of internet finance. The mutual rectification of internet finance has been postponed for a year or two, indicating the complexity and seriousness of the matter.
According to the industry, from 2005 to 2012 is the initial stage of the development of internet finance in China. Third-party payment, P2P online lending, crowdfunding and other real internet financial business forms had emerged during that time. The third-party payment platforms then rapidly extended to lifestyle services. P2P online lending, an iconic business form of internet finance appeared in China in 2007; after 2010, P2P online lending grew rapidly. As the pace of supervision failed to keep up the growth, a large number of inferior P2P online lending companies appeared in the market, resulting in various violations.
Risks have not hindered the rapid development of internet finance. The year 2013 was often considered as the year where the development of internet finance in China began. Alibaba's financial product Yu'e'bao is an example of such development, China's Internet finance entered a period of rapid development. Third-party payment became gradually matured, P2P online loans mushroomed, and crowdfunding platforms started. Internet insurance and Internet banking had been approved for operation. At the same time, brokers, funds, trusts, and others has begun to use the internet to conduct business, and online financial supermarkets had emerged. It should be noted that the development of internet finance has been endorsed by the state. Premier Li Keqiang has repeatedly issued talks to encourage and support the development of internet finance. The administrative departments and regulatory authorities have also introduced policies to strengthen the guidance and regulation of the internet finance industry and business models. Internet finance has entered a stage of rapid development.
However, the rapid development of Internet finance is accompanied by the constant exposure of financial risks. Many of the internet finance incidents and scams erupted, and they have shaken the Chinese society. Judging from the big cases that have emerged in recent years, illegal fundraising in the name of internet finance are getting more and more serious. For instance, when the lending scheme Ezubao had begun its operations, it attracted as much as RMB 74.7 billion and more than 900,000 investment users in its first 505 days. The amount involved in the final trial was as high as RMB 76.2 billion, and the unpaid amount was as high as RMB 38 billion. From 2011 to 2016, the number of internet finance companies that have been closed down and are problematic has reached 1,896.
More fraudulent cases have erupted in 2018. In June 2018, the number of closed and problematic online platforms was 80, of which 17 were platforms for transition and 63 were problematic online platforms, setting the highest peak for the cases of problematic platforms in a single month this year. In the past two months, more and more fraudulent cases of Chinese internet financial platforms are reported. As of July 7, in Hangzhou the total transaction volume of problematic P2P platforms exceeded
RMB 50 billion, and the number of users would exceed one million.
It is worth noting that the rapid development and evolution of Chinese internet finance has formed a subtle link with the Chinese government's policy. Since 2014, "internet Finance" has been included into the government work report for five years, and the wording is different every year: in 2014, the report proposed "promoting the healthy development of internet finance"; in 2015, when reviewing the work in 2014 "the emergence of internet finance" was mentioned; in 2015 it had been proposed that "the healthy development of internet finance" was to be promoted; in 2016, "regulating the development of internet finance" is mentioned; in 2017 it was "alert on accumulated risks such as internet finance" while in 2018 it has become "comprehensive internet finance supervision". From the "promoting development" to "regulating development" to "alert of the risks", then the "comprehensive internet financial supervision" in 2018, such changes in wording reflect the changes in the industry environment and reveal its risks. These five years in the Internet finance industry have seen explosive growth and witnessed the sudden rectifications. Why then, does this cycle happen in just five years?
According to the analysis of Anbound's chief researcher Chan Kung on the sources of internet finance risks, in the conventional financial services the requirements of the financial system for the security environment are always been a closed-loop operation. Although the banking system has also experienced risks, because of the closed-loop operation of the banks, the problems can be resolved internally and will have fewer chances to evolve into a systematic financial risk. However, although internet finance is said to be "very secure" technologically, from the perspective of financial security, internet finance transforms the closed-loop operation of the conventional financial industry into open-loop operation, which means it is open to the society and other systems, which in fact is rather risky. Chan Kung points out that he does not believe that the existing technology is well prepared for financial risks. Internet financial service providers and technology providers can only provide superficial assurance to gain more space for the development of internet finance.
The growth of Internet finance has caused the mushrooming of innovative businesses, as well as a large number of risks. The innovation of internet finance business is far ahead of financial supervision, resulting in vicious incidents. Taking illegal fund-raising cases as an example, if an illegal fund-raising business in the old financial era reached a scale of more than RMB one billion, it can be considered as something mammoth. However, in the internet age, the scale can reach RMB 50 million to 60 million easily, and the victims can be up to hundreds of thousands or even millions of people. Even under strict control, the risks in the internet finance sector are still being revealed, which not only leads to insufficiency of investor confidence, but also increases the average daily redemption of financial platforms and escalates the market's expectations for financial risks.
So far, China's rectification of internet finance is basically not a voluntary regulation and cleaning-up, but a passive investigation and patching policy adopted after a number of major internet finance cases have occurred. Undoubtedly, such method appears to be relatively backward. The special rectification of Internet finance in China needs to change from being passive to active. It should be a systematic supervision before the cases could even happen, and there should be delineation of the boundary of the internet finance industry; at the same time risk management and control should be strengthened as well.
Final Analysis Conclusion:
The explosive growth of China's internet finance has spurred the emergence of internet financial services but also caused a number of fraudulent cases. In response to this, the relevant policy departments apparently did not make enough preparations, resulting in the supervision lagging far behind development, and leading to industrial policies passively following the market development, forming a policy cycle of just five years.
