Update | China sets rules for online lenders as it vows to cleanse the market

The mainland has taken its first concrete step towards reining in its boisterous online lending industry, which has grown increasingly problematic and threatens to endanger financial stability.

In draft rules issued this week, the China Banking Regulatory Commission defined such businesses as internet financing intermediaries that operate between borrowers and lenders, which means they cannot raise or lend funds on their own.

The commission acknowledged that an absence of risk controls and supervision, together with a shortage of rules, had allowed some firms to illegally raise funds and flee when the risks were exposed.

READ MORE: Funds frozen in China P2P cleanup

The regulator said 2,612 peer-to-peer (P2P) online lending firms were operating normally by the end of last month, while more than 1,000 additional lenders were considered problematic, accounting for 30 per cent of the total.

The draft came after Fanya Metals Exchange failed with 36 billion yuan (HK$43 billion) owed to investors. It also came after an investigation into the financing model of Ezubao, which raised 75 billion yuan from more than 900,000 ­investors.

The commission’s draft regulation, issued on Monday, forbids P2P online lending firms from selling wealth management products, insurances and trust products, which often promise high ­returns. It also bans such firms from guaranteeing yields as well as from pooling their investors’ money.

In another move to shore up financial stability, the central bank, the People’s Bank of China, announced yesterday that it would improve management of deposit reserves and credit creation from 2016, expanding its supervision to cover more bank assets and including more parameters in its deposit reserves policy.

Observers say the move will give the central bank a bigger role in financial supervision.