A wave of defaults is sweeping across China’s Rmb1.3 trillion ($256 billion) peer-to-peer lending industry, causing investors to withdraw funds and platforms to collapse, the latest casualties of Beijing’s broader crackdown on debt and financial risk.
About 150 online lending platforms have suffered “problems” since the beginning of June this year, compared with 217 such cases in all of 2017, according to Online Lending House, a research group that tracks the industry.
The group defines “problems” as investors being unable to withdraw money, police investigating a platform, or owners running away.
In the wealthy city of Hangzhou, local officials converted two sporting stadiums into makeshift welcome centres where various district-level petition bureaus – the traditional channel for Chinese citizens to file miscellaneous grievances – could receive complaints from P2P investors. Hangzhou is best known as the headquarters of Alibaba, its finance affiliate Ant Financial, and other fintech groups.
At the end of June there were 1836 online lending platforms operating in China. The industry, the largest of its kind in the world, channelled loans from 4.1 million investors to 4.3 million borrowers in June alone, according to Online Lending House.
“I had some friends in finance who said I had to be careful, but because I had used it for so long I felt that I could trust the app,” said Sarah Chen, 32, a consultant in Shanghai who invested Rmb290,000 in a platform called Zhuaqianmao, a P2P platform. Its name translates as “money grab cat”.
Went to police
She said she was unable to redeem her investment when it matured on July 16, adding: “I went to Huangpu [district in Shanghai] police to report my case and saw many, many people reporting cases – from other apps, too, not just Zhuaqianmao.”
A security guard at one stadium in Hangzhou said many people had come to complain about Zhuaqianmao. The company did not answer calls seeking comment, while photos on social media showed the locked doors of its Hangzhou headquarters with a notice from police saying that the company was under investigation.
“A portion of borrowers have maliciously fled their debts, while some false rumours and inappropriate reports have misled public opinion, causing investor confidence to fail,” the National Internet Finance Association, a government-backed industry body, said in a statement last week.
Industry experts believe the recent wave of defaults reflects a combination of regulatory failures, outright fraud and the impact of a broader debt-cutting campaign that is cutting off liquidity to shadow banks and weak borrowers.
Such borrowers may rely on P2P loans alongside other financing sources. If banks or other financial institutions cut lending, the impact can spark defaults on P2P loans to the same borrower.
“A fair share of the recent P2P thunderstorm comes from lawless people operating under the guise of internet finance to commit fraud,” said Ben Shenglin, dean of the academy of internet finance at Zhejiang University in Hangzhou.
“Beyond that, overall economic conditions have deteriorated, and then you add the impact of the deleveraging campaign, which means some legitimate platforms can’t find a profitable niche.”
A multi-agency government task force on internet finance launched a rectification campaign to clean up the industry in April 2016. The following August, the task force issued the first comprehensive regulatory framework for the industry, banning risky practices such as guaranteeing loan principals and using fund inflows to meet payouts due to previous investors.
But the rectification campaign is taking longer than planned, especially a requirement that every platform complete a so-called “record filing” – essentially a form of licensing – with the local financial affairs offices in their home region.
The filing requirement was designed to flush non-compliant platforms out of the industry, but the process has proved complex and difficult to implement. The original deadline to complete filings was August 2017 but was later pushed back to April 2018.
As that deadline approached, local media reported that China’s central government had instructed local authorities to suspend filings altogether until the task force could formulate unified standards.
Pan Gongsheng, deputy governor of the People’s Bank of China, said this month that the rectification campaign would take another one or two years to complete.
Despite these problems, there are signs that China’s ruling Communist party still supports the P2P lending industry’s development as a way of providing credit to consumers and small business, which are poorly served by traditional financial institutions.
A commentary from the official Xinhua news agency this month said there had “long been expectations” of a default wave and warned against casting aspersions against the entire industry.
“Survival of the fittest is a law that the development of every industry must respect. One cannot blindly negate the industry because of short-term problems,” the agency quoted Yang Dong, director of the Centre for Internet Finance at Renmin University in Beijing, as saying.
by Gabriel Wildau and Yizhen Jia