In China, ‘Finding The Right Balance Between Financial Reform And Risk Prevention Will Be One Of The Most Important Issues Of Our Time’

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“Finding the right balance between financial reform and risk prevention will be one of the most important issues of our time,” writes Ruizhe Zhang of Dagong Global Credit Rating Co Ltd, in a recent China Daily op-ed on ECNS. Following the release of Internet finance guidelines from 10 of China’s central government ministries in July, and amidst concerns in the wake of the country’s recent currency devaluation and stock market crash, Zhang is calling for a unified regulatory standard for the sector, involving,

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.

Though the recently released guidelines have helped stimulate the market, a series of problems still exists. Zhang breaks this down into three main points:Dagong Global Truth

1. Risks involved in online finance should be taken seriously.

The sector depends greatly on computer technology, and distinctly lacks information disclosure, a risk management system and professional personnel. Compare the online and offline sectors, and the credit risk of the former is noticeably more serious. Yes, online finance has made it much easier for small businesses to access funding, but at the cost of creating regulatory loopholes. In addition, many more small investors are involved in the online market, exposing society to greater financial risk.

2. There is a lack of external supervision as well as constraints.

Financial regulations has two main problems: a) a lack of rules governing online financial businesses, which applies to high-risk loan pools, which exist in P2P lending, crowdfunding and securities platforms; and b) issues with capital flows on Internet financial transactions and the lack of monitoring. For the latter, the problem is that real estate projects are turning to the Internet for financing to avoid bank credit restrictions, and the increasing number of these transactions will affect and weaken monetary policy decisions.Beijing Traffic Jam China

As a result of how online financial platforms have covered payments, credit, securities, insurance, trusts and other kinds of business, Zhang notes that “an Internet shadow financial system has emerged, which is difficult to monitor while posing liquidity risks.”

Expanding on his recommendation of “a detailed system of information disclosure alongside financial guidelines,” Zhang added,

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.

He also warns,

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.Risk versus Reward

3. Balancing the cost of online financial supervision while promoting Internet innovation.

Zhang acknowledges the challenge of making regulations work efficiently, while allowing businesses to grow, especially given how crowded the online space is with platforms that vary in size, complexity and where they fall on the good/bad scale.

Unfortunately, Zhang concludes, “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.”

He notes that,

In the end, greater transparency will reduce systemic financial risks as well as safeguard the rights and interests of individual and institutional investors.

 

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