Zhang Liling, 20, almost put 200 yuan ($32.12) into a new online financial product offered by Chinese e-commerce giant Alibaba that she hoped would give her a chance to meet some movie stars.

Alibaba’s “Yu Le Bao” (Entertainment Treasure) is billed as a way for ordinary Chinese to become micro-financiers in films with as little as 100 yuan.

“Sadly, my parents objected, fearing this is a scam,” said the student at a Beijing university.

Public interest ― and suspicion ― in the online investment phenomenon of “crowdfunding,” where funds are amassed through small contributions from a large group of people for initiatives ranging from start-ups to charities, has grown so quickly of late that a top official came out to address the issue yesterday.

Crowdfunding potentially poses relatively large legal risks and should be regulated, warned Liu Zhangjun, who heads a task force carrying out Beijing’s clampdown on illegal fund-raising.

He also warned against rising default risks from online credit platforms, some of which behave like Ponzi schemes, using new contributions to repay old debt.

In the first comments by a senior Beijing official on this relatively new financial practice of crowdfunding which has also caught on internationally, Liu acknowledged that it does help to “advance financial innovation and the market mechanism.”

Such innovation is supported and encouraged by the government, but it should not “cross the red line” into unlawful activities, he told a press briefing on illegal fund-raising in Beijing.

He said the fledgling sector faced higher “legal risks” as it is currently not controlled by legislation, its barriers to entry are low and it relies on self-policing.

Crowdfunding “has the special characteristics of raising funds from the public, and therefore should be governed by current laws and regulations,” he added.

Unlike in the United States, where it is legalized through a new law for business fund-raisers in May 2012, China’s crowdfunding networks have yet to be regulated although popular platforms like Dreamore debuted in 2011.

Dreamore has reportedly raised over 6 million yuan for over 300 projects. These include two girls seeking to build a spicy cakes franchise and a farmer in coastal Fujian province expanding his organic Chinese pearl barley farm.

Renmin University professor Deng Fengtian lauds crowdfunding for providing much-needed financing for those unable to get credit from state banks.

No data is available but China should be one of the faster-growing markets in the world, said venture capital fund consultant Li Yingying. “China has the biggest online population ― about 600 million ― in the world and its netizens are eager to find new channels of investment as alternatives to the overheated property market and volatile stock market.”

But as crowdfunding products proliferate, so have the risks. The media have criticized some for being marketing stunts and others for their lack of transparency. Some worry over the blurred line between informal banking channels and crowdfunding.

The authorities are taking steps to tighten regulation for online financing, said Liu.

He said the China Banking Regulatory Commission has been leading a push to draft more specific rules to regulate the activities of so-called peer-to-peer platforms, where borrowers and lenders are matched online.

By Grace Ng

(The Straits Times)