Moody's: China's new measures on P2P lending are credit positive

The global credit rating agency Moody's called China's newly-issued regulations on peer-to-peer lending platforms are "credit positive", because they will strengthen protections to individual lenders and prevent risk spilling over to the broader financial system.

Moody's commentary came after Chinese regulators announced 10 measures to address risks related to P2P lending platforms on August 12. The P2P platforms enable individuals to lend directly to borrowers through the Internet.

The new regulations clarified responsibilities of P2P platforms and their shareholders, stipulated conditions for orderly liquidation of failed platforms, outlined penalties for borrowers that escape their debt obligations and prohibited registration of new platforms.

These measures were issued when P2P platform failures emerged in June and July, amid rising cases of corporate default, tightened liquidity and strengthened regulatory scrutiny in the broader system.

"We believe financial institutions' direct exposure to P2P platforms is limited," said David Yin, a VP and senior analyst with Moody's Investors Service.

The agency said Chinese banks' involvement in those platforms has been limited to serving as custodians and they rarely provide funding. But some non-bank financial institutions, such as trust companies and micro-credit companies, may face higher risk. As they lend to P2P borrowers, they would suffer losses if the platform failed.

"The new measures, consistent with other rules announced since the end of 2017, show that authorities will further tighten regulation of internet financing, which has become a breeding ground for fraud and misappropriation," Yin said. "And they will help stabilize the P2P sector and resolve failed platforms."