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China's government has approved a sweeping plan to clean up the country's online financial sector, according to sources with direct knowledge of the matter, including rules to limit the activities of P2P lending firms, the source of recent fraud scandals.
The government plan, which was drafted by China's central bank, follows a mid-April videoconference with 14 ministries and regulators organised by the State Council, the country's cabinet, which approved the plan document seen by the sources. The plan outlines stricter rules for peer-to-peer (P2P) platforms, where lending increased 300 percent last year to 440 billion yuan ($67 billion), according to Citigroup research, forbidding them from holding their clients' capital in house.
Instead, client funds must be deposited with a qualified third-party banking institution and kept separate from a P2P platform's own corporate funds, the plan said, while firms must also set up "firewalls" to manage transactions with affiliates. In February, authorities arrested 21 officials of Ezubao, once China's biggest P2P lending platform, which collected $7.6 billion in less than two years from more than 900,000 investors. Ezubao used savvy marketing, authorities said, to fund "a complete Ponzi scheme", that used investor funds to support a lavish lifestyle for company executives. Internet lending has made headlines not just in China recently, with the US Department of Justice opening an investigation into San Francisco-based Lending Club Corp.

Copyright Reuters, 2016

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