It is necessary for the government to exercise reasonable supervision on the booming Internet finance industry to ensure the healthy development of the sector without hurting innovation, says an article in 21st Century Business Herald. Excerpts:

The administrations of banks, the stock market, industries and insurance are making a supervisory rule for Internet finance, according to the principle of “negative list”.

People are concerned the new rule will hinder the fast growth of the innovative sector. In fact, reasonable supervision can ensure the healthy development of the new industry. The administration needs to pay attention to protect the innovative spirit of Internet finance, and the market should not simply compare the relation between administrations and enterprises to that of cat and mouse.

Freedom of financial innovation should take risk-control and security as its prerequisite. Information asymmetry cannot be solved by the advancement of information technology. In this sense, financial innovation based on individual rational choice cannot effectively overcome collective irrationality. This is the legal foundation for which to exercise supervision in the new financial market.

The potential risks of Internet finance in China are obvious. The credit systems of individuals and enterprises are not yet developed. Internet enterprises have not provided effective safety protection for their customers’ information, so the customers are not willing to input more real information, which increases the enterprises’ costs of verifying information.

On the other hand, some information enterprises not only sell financial products to their customers but also serve as credit intermediaries. The enterprises let the customers enjoy the benefits of innovation, and show the exposure risks of poor supervision at the same time.

Freedom of innovation should not affect other parties’ legal rights of freedom. Some popular Internet financial innovations in China today have not found a balance between lowering trade cost and improving capacities of risk management and control. Some innovations neglect the safety of customers’ information and wealth, revealing increasing moral risks of the financial innovations.

Moreover, the concept and paradigm of financial supervision directly influence the direction of innovation. The government should mark the boundaries for the practice of supervisory powers. The “negative list” should also be updated constantly.