First, the lack of a social credit system continues to be a main constraint for China's economic development. P2P financing platforms rely heavily on borrower-and-lender credibility. As China is determined to further liberalize its financial sector, suitable participant credibility is the most important element for its financial market development.

Second, lawmaking in China's financial sector is grossly underdeveloped. Just as Chinese economic growth is faster than expected; the legal framework to support economic growth is much slower than expected. As the financial market boom accelerates, the financial laws and regulations are left far behind. In addition, the current regulatory regime is questionable because several regulatory authorities exist within the same sector. Undoubtedly, P2P finance has significantly changed the financial landscape in China; consequently, financial lawmaking has become more challenging. Before sufficient laws and regulations are in place, both lawmakers and P2P investors will have to face frustration.

Third, China has to balance regulation and deregulation simultaneously and must find an optimum compromise between financial restriction and liberalization. Before arriving at the best alternatives to achieving financial stability, the Chinese government has no choice but to enforce strict measures in order to control the potential risks in its financial markets.

The fact is there is very little developed world experience that China can learn from in order to formulate needed P2P regulations. P2P markets are so new, so unregulated, so diversified, and so invisible that countries have begun to explore appropriate legal frameworks for regulation only in recent years. Institutional gap between current laws and such financial market transactions also exist in the U.S. and U.K. The major difference is that China is a large saving nation, and the Chinese people may be easily tempted by new financial opportunities and move away from within the established banking system. As a consequence, the government has to try to avoid two contradicting scenarios -- either watch as customers actively withdraw their money from major banks to invest in P2P financing or watch them suffer from ill-advised investment in P2P financing because of a lack of knowledge. Neither scenario is good for China's social and financial stability.

The Chinese culture is deeply rooted in saving for the future and for future generations. In the past, China's per capita GDP was very low, Chinese people exhibited a very high saving ratio in traditional banks. Today, with interest rates at conventional banks being set by the central bank and the stock market fluctuating dramatically, the question has become "how to manage one's monetary assets for the future without undue risk and with an adequate return?"

In recent years, online financing has become an attractive way to facilitate small-scale financing between individuals and businesses. But, needless to say, without proper regulation, risks abound. The rapid boom in P2P financing in China represents a growing interest in non-banking investment. Although P2P financing cannot replace time-honored bank lending, it will most likely continue to grow.

P2P financing has fundamentally altered the way credit is allocated in China; therefore the single largest challenge for policy makers is how to regulate and guide the growth of this social financing and not to simply block it. Only with the rule of law can China's P2P development be spared from irrational and reckless exuberance.

The author is a columnist with China.org.cn. For more information please visit: http://www.ccgp-fushun.com/opinion/zhanglijuan.htm

Opinion articles reflect the views of their authors, not necessarily those of China.org.cn.