To reduce the risks of Internet finance， the China Banking Regulatory Commission（CBRC） will take the initiative to work out how to effectively supervise peer-to-peer （P2P） lending and borrowing， said yan Qingmin， vice Chairman of the CBRC， at the recently concluded Boao Forum for Asias annual conference.

It has been just a few years since P2P lending companies， such as CreditEase， Eloancn and Ppdai， first began to experience speedy expansion. The first crop of P2P lending companies sprouted up in 2006， and soon entered a period of explosive growth. The number of such platforms soared from 9 in 2009 to 110 in 2012， and further surpassed 700 at the end of 2013， with total transaction value exceeding 100 billion yuan（$16.08 billion）.

Behind the wild expansion， however， is the frequent breakout of risk events. According to statistics， since the beginning of 2013， a total of 85 P2P lending companies have taken the money and run or gone bust.

Now， the CBRC has made clear that P2P companies are prohibited from establishing capital pools， funding deceptive projects， raising money for their own businesses， or making guarantees. There is no denying that all the sectors， especially the financial sector， cant go on without supervision. yet， improper supervision will not only fail to protect the interests of investors， but also increase the transaction costs and risks that investors have to confront.

Online P2P lending bypasses traditional financial intermediaries and links lenders with borrowers through the Internet， which remarkably reduces financing costs and gives investors more options. Its somewhat a novelty in the financial market.

However， considering that investorsconsciousness of risk always lags behind the eruption of such risks and the possibility of some unscrupulous financial institutions deceiving their clients， online P2P lending will do more harm than good without strict supervision.

However， improper supervision may cause great damage to the emerging sector， as was the case with measures taken by the U.S. Securities and Exchange Commission（SEC） in the American P2P lending market. The SEC plays a vital role in ensuring the transparency of the traditional financial industry. The supervisor protects investors by forcing companies to publish their corporate information， which contradicts the purpose of P2P lending platforms—ensuring the openness of borrowers credit information on condition that their personal information is kept in secret.endprint

Meanwhile， investors are not focused on the operational conditions of P2P companies but on whether P2P companies have performed an all-round background check on borrowers qualifications to get loans， a factor which happens to be undervalued by the SEC. In this way， supervision by the SEC only raises legal costs for these companies， instead of advancing the safeguarding of investor interests.

The SEC also requires P2P companies to publish their credit rating model for borrowers， enabling borrowers to manipulate the model and improve their credit ratings， which lowers the accuracy of credit rating and increases investment risks.

In addition， part of borrowers private information has to be exposed to the public under the SECs supervision， which goes against the initial intention of borrowers.

All the above-mentioned factors have combined to deal a heavy blow on the American P2P industry. As soon as the SEC unveiled its supervision regulations， some small P2P companies gave up getting registered and shut down. Moreover， supervision by a single institution can hardly be expected to cope with such complicated and rapidly evolving financial innovations. There are voices within the industry claiming that the supervision of Internet finance needs concerted efforts by all concerned authorities， has to avoid being overly strict， and will be required to continue to innovate and break with tradition in its practices. Furthermore， due to the diversification of Internet financial products， a lot of work needs to be done in carrying out classified supervision.

As e-commerce companies are doing battle with traditional banks， the online insurance sector has also begun to expand exponentially. The banking， securities and insurance sectors are becoming increasingly interwoven with each other using the common medium of the Internet. Under such circumstances， P2P lending and borrowing will involve more sectors， such as banking， securities， insurance and funds. The risks of Internet finance may be spread across multiple dimensions. Once they break out， the negative effects can be tremendous and may put the fear of God into the whole financial market.

Therefore， the policy framework of supervision on Internet finance in China should be formulated by the Peoples Bank of China， as well as the CBRC， the China Insurance Regulatory Commission and the China Securities Regulatory Commission. The prospective guideline for regulation of the booming Internet finance industry will serve as the institutional foundation， with specific policies being drafted by the three commissions according to the different sectors involved. And the focus should be on information transparency， system security and the stability of back-office support. Only in this way can Internet finance risks be significantly kept under control.endprint