Last Friday, the People's Bank of China released a second consultation paper for the internet payments industry. At China Smartpay Group (8325 HK), our official position is as follows:

First, we think this consultation paper represents a very favourable regulatory environment for the sector. The central bank is striking a fine balance between prudential supervision and leaving enough flexibility to thousands of players. It is true that the regulators are tightening supervision. But that is probably long overdue. We support the central bank's stance, as we see real risks and loopholes in the industry. We think that the whole consultation paper can be condensed into two lines: "Third-party payments operators must not take deposits", and "They must know their customers (KYC)". Clearly, no one can argue with these rules.

Given the nature of the industry (i.e., facilitating small payments), we do not see the size caps specified in the consultation paper an issue, unlike some commentators. We also note that in OECD countries, rules on the sector are much more onerous.

Second, the consultation paper is only relevant to "third-party internet payments", but not to the prepaid cards sector where a separate set of regulatory regime already has already existed. China Smartpay is a national prepaid card issuer, and is already regulated by, and is in full compliance with, those rules.

Third, the suggested rules in the consultation paper, if adopted eventually, would hurt a large number of P2P operators. But that is only fair. P2P operators are supposed to be only matchmakers between savers and borrowers, and are not supposed to gather deposits, unlike banks. Savers' funds are only supposed to be in custodian accounts at banks. However, a large number of these operators have so far taken deposits, in violation of the guidelines set by the central bank and the CBRC (China Banking Regulatory Commission).

So far the regulators have not clamped down on these violations. This leniency must not continue for too long as growing numbers of retail investors have suffered losses. We believe that bigger and better P2P firms will benefit from the phase-in of new regulations. China Smartpay has a concrete plan to expand our business into P2P and wealth management. Naturally, we will only work with those that are in full compliance with regulations.