Plan will reduce internet finance risks

China will establish a centralized depository system to protect clients' funds that are held by nonbanking payment institutions, under a plan unveiled on Thursday by the central bank and 16 other central government ministries and departments.

The plan also mandates a crackdown on unlicensed payment operations in order to reduce risks and support the healthy development of the online financial market.

The plan is part of China's efforts to contain internet finance risks, improve the competitive environment and boost investors' risk awareness.

Regulating and developing internet finance has been an important facet of the financial system reform advanced in the Government Work Report, delivered in early March by Premier Li Keqiang.

Guaranteeing the security of clients' money is a focal point of the supervision of nonbanking payments. Client reserves are not payment institutions' assets, yet nonbanking payment institutions currently deposit such funds separately in multiple banks under their own name.

According to the People's Bank of China, payment institutions open on average 13 accounts for clients' funds - one had opened 70 such accounts. Under such circumstances, it is difficult for regulatory authorities to monitor the security of the money, which increases the risk of embezzlement.

The centralized depository system will help protect clients' money and minimize risks, the People's Bank of China said in a statement.

Meanwhile, special regulatory efforts will focus on cracking down on unlicensed nonbanking payment operations.

Xu Hongcai, a researcher at the China Center for International Economic Exchanges, said: "The 'barbarian growth' of internet finance recently exposed many risks. Joint regulation and supervision are necessary for the healthy development of this industry."

Wang Wen, executive director of the Chongyang Institute for Financial Studies at Renmin University of China, said the core of the regulatory work is to minimize systematic financial risks.

"The key to regulation is to make rules for internet finance and raise the threshold for entering this field," he said. "Otherwise, the industry will face the risk of fraud and disorder."