HONG KONG: China's central bank is trying to tame online finance.
The country's internet industry has aggressively moved into digital credit cards and online funds.
Now the authorities are fighting back with a series of proposed curbs.
But by attempting to impose order, regulators may be endorsing rather than killing online finance.
E-commerce group Alibaba and social media company Tencent have mounted an increasingly potent challenge to China's tightly-controlled banks.
The core offering is payments.
China's online third-party payments market is currently worth 5.4 trillion yuan ($860 billion) and is expected to more than double in the next four years, according to iResearch.
Alibaba's payments arm, Alipay, commands over half of this market with 300 million users. By processing billions of transactions each year it has built up a trove of its users' online spending habits.
The recent growth area is investments.
While still a sliver of China's financial sector, money market funds distributed online are increasingly popular.
According to Barclays, they account for less than 1 percent of over 100 trillion yuan held in bank deposits as of the end of 2013, but their assets have swelled by an average of 93 billion yuan each month from last July to January this year.
Alipay's wildly popular Yu E Bao fund has attracted 541 billion yuan since it launched last June. State-owned banks like ICBC have been forced to respond by offering their own versions.
This growth owes more to regulatory arbitrage than technological innovation, however.
Banks are prevented from paying an interest rate of more than 3.3 percent on one-year deposits. Money market funds offer annualized returns between 5 percent and 7 percent. It's hard for savers to tell the difference in risk between the funds and regular deposits.
Online lending has similarly flourished in legal gray areas.
The number of peer-to-peer (P2P) lending platforms, which connect lenders to borrowers directly, grew from nine in 2009 to over 800 by the end of 2013, with total lending of 100 billion yuan, according to a report cited by state media.
Having allowed online finance to flourish, Chinese authorities are now reining it in. Leaked draft rules drawn up by the People's Bank of China (PBOC), suggest limiting third-party online payment transactions to 5,000 yuan per transaction or 10,000 yuan a month.
Though the central bank insists the proposals are far from finalized, such a rule could limit the growth of online payments.
In April, the PBOC issued a joint document with the banking watchdog requiring lenders to limit the amount of money their customers can transfer to payment platforms such as Alipay and Tencent's Tenpay.
The transfer limits, which restrict the size of each transfer or the amount that can be transferred in a single day, are based on the person's financial status.
The latest rules are unlikely to have a significant impact.
They primarily target so-called "express payments," which allow Alipay or Tenpay users to make online transactions simply by providing a bank card number and a password. If Alipay users want to make larger transactions, they can simply apply to their banks to increase the limits.
Regulators have been tougher on a proposed new mobile payment system, which would have allowed Alipay and Tenpay users to apply for credit cards issued by CITIC Bank. Holders could use these "virtual credit cards" by scanning a code from their phones.
The PBOC unexpectedly imposed a ban, which it claims is temporary, until security standards for the code payment technology become clearer. Nevertheless, the move also protects Unionpay, which process credit card payments in China.
Money market funds may also be facing greater regulation.
According to mainland media reports, regulators may force the funds to set aside some of their cash as reserves, just like banks, which must keep 20 percent of their deposits in reserve to meet sudden withdrawals. Should money market funds face the same requirement, Credit Suisse forecasts that yields will drop by 88 basis points.
But investors may be too quick to assume the worst.
A PBOC-led campaign to regulate legally untested online products looks like an effort to bring internet finance into the mainstream.
This is in contrast to the crackdown on Bitcoin, which has been in retreat since the PBOC banned banks from trading in the virtual currency last December.
Regulators have approved private banking licenses for Alibaba and Tencent as part of a pilot program in March.
If China's internet giants are serious about challenging traditional banks, being treated as one by regulators should not be seen as a threat, but as a welcome first step.
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