CHINA has been struggling to tame its shadow banks for years. Now, a stock market crash has hamstrung some of the fastest growing ones in a matter of weeks.

    Loans from sources such as online lenders for equity purchases have plunged by at least 700 billion yuan (US$113 billion), a drop of 61 percent from this year’s peak, after authorities banned them from funding stock buying in July, according to a survey conducted last month.

    Peer-to-peer Internet lending for the purchases had more than tripled to 8 billion yuan in the second quarter, according to research firm Yingcan Group.

    The reversal has helped cull riskier lenders in China’s online market, which was surging before the equity rout wiped out more than US$4 trillion.

    The government has already curbed traditional forms of unregulated funding — such as trust loans — as part of its effort to wean the economy from debt-fueled growth after corporate defaults mounted.

    “The new regulations are making the industry more disciplined and transparent,” said Wei Hou, a senior equity analyst for Chinese banks at Sanford C. Bernstein & Co. “There may be short-term pain of a number of small players closing down. But it’s good for the industry in the long term.”

    While peer-to-peer lending was pioneered in the United States by companies such as LendingClub Corp., China is where it’s really taking off. Origination of such loans totaled the equivalent of US$41 billion in 2014 and will exceed US$332 billion by 2017, according to Maybank Kim Eng Securities Pte. That compares with only US$6 billion in the United States last year.

    The China Securities Regulatory Commission said July 12 that it would stop online sites from handing out loans for share purchases. Internet finance firms will need approval from financial as well as cyberspace regulators, the People’s Bank of China said July 18. (SD-Agencies)