Products such as Yu'ebao, which enable moving deposits within the banking system, have helped bypass the deposit rate ceiling and paved the way for its ultimate removal, which many experts feel is the last step in China's interest rate liberalization.

What's more, the competition that Internet finance has brought to banks also shows the need to dismantle the banking monopoly by allowing diversified forms of financial players to enter the industry.

In this sense, the rise of Internet finance is in line with the reform strategy of China's leaders. Premier Li Keqiang's frequent meetings with top executives of Internet giants spell out his wish to use Internet innovation to propel reforms. That may also explain why products such as Yu'ebao have not been banned even if they are prompting banks to wage a hard battle to retain depositors.

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Recently, officials from the China Securities Regulatory Commission and the central bank have made it clear that such products are legal and would not be subject to any crackdown.

But this is not to say Internet finance should be free from supervision. Instead, due regulations should be placed on the fledgling sector to prevent it from running away and inducing financial risks.

As more individual investors withdraw their money from banks and join the bandwagon of Internet finance, problems pop up - and there are at least three of them.

Most of the Internet finance companies do not have a sound reserve system to ensure the interests of retail investors.

Internet finance companies mostly earn money by charging management and service fees and through bridging borrowers and lenders. They are not banks, so they are not legally bound to be placed under a reserve system, as commercial banks are required to do.

But considering the fact that Internet finance players also raise money from individuals, it is reasonable to ask these players to establish a similar reserve system to ensure investors' interests in case of default. The reserve may come from the companies' own money or from part of the money they raise. But the required reserve ratio need not be as high as banks should possess because Internet companies face a much narrower interest rate gap than banks.

Apart from the reserve system, Internet finance companies are often lax in disclosure of information. Unlike banks, they do not reveal the specifics of the products or the risks involved to retail investors.

Some Internet finance companies are rather bad at risk control and are illegally involved in the lending business. This is more common among peer-to-peer lending websites.

According to p2p001.com, 75 P2P lending websites closed last year. They accounted for more than 10 percent of the total. But 13 new ones were set up in the first two months of the year, bringing the total number to 626 by the end of February.

Several massive fraud cases that involved P2P financial websites this year also spoke volumes about the irregularities they face.

The author is a Shanghai-based financial analyst. The views do not necessarily reflect those of China Daily.

 

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