Internet finance guidelines were released by 10 central government ministries last month. The move has helped stimulate the market, but there are still a series of problems to solve.
The first point is that the risks involved in online finance should be taken seriously. It is highly dependent on computer technology, and there is a distinct lack of information disclosure, a risk management system and professional personnel.
Compared with the offline financial market, the credit risk of the online sector is more serious. While it has partly solved the problems of financing for small enterprises, it has also created regulatory loopholes. At the same time, there are many more small investors involved in the online market, which has exposed society to greater financial risk.
The second point is that there is a lack of external supervision as well as constraints. There are two major problems involving Internet financial regulation.
One is the lack of rules governing online financial businesses. This applies to high risk loan pools, which exist in peer-to-peer lending, known as P2P, crowdfunding and securities platforms.
The other problem concerns capital flows on Internet financial transactions and the lack of monitoring. To avoid bank credit restrictions, real estate projects are turning to the Internet for financing. As these transactions grow, it will affect and weaken monetary policy decisions.
So far, online financial platforms have covered payments, credit, securities, insurance, trusts and other kinds of business.
As a result, an Internet shadow financial system has emerged, which is difficult to monitor while posing liquidity risks. This needs to be addressed.
From my point of view, there should be a unified regulatory standard. This would involve a detailed system of information disclosure alongside financial guidelines. Furthermore, all online capital flows should be monitored and Internet banks should be incorporated into the deposit reserve system.
The Internet securities sector should be strictly supervised to the same level as the offline business, which will plug the loopholes in the system. If not, the online financial industry will become another weakly regulated area, mirroring the shadow banking sector.
With the country's economy and financial markets going through great change, handling these issues will be crucial. Finding the right balance between financial reform and risk prevention will be one of the most important issues of our time.
If we get it wrong, we could produce a financial crisis that will cause irreparable and long-term damage to the economic system, which would seriously affect society.
Finally, the third point involves balancing the cost of online financial supervision while promoting Internet innovation.
Making regulations work in an efficient manner, while allowing businesses to grow, will be challenging. Cyberspace is crowded with online financial platforms. Some are large while others are small in scale. Some are extremely complex, while others take a more simple approach. Good and bad are intermingled.
Unfortunately, the traditional way of bringing in regulations may be difficult and would come at a high cost. To solve the problem, we should improve Internet financial information disclosure guidelines and establish credit rating information on shared platforms.
In the end, greater transparency will reduce systemic financial risks as well as safeguard the rights and interests of individual and institutional investors.
The author Ruizhe Zhang is from Dagong Global Credit Rating Co Ltd
