Fall­ing Domi­noes

In­ter­est rates promised by P2P com­pa­nies seemed too good to be true. They were. Now many mom and pop in­vestors stand to lose their life sav­ings

NewsChina - - CONTENTS - By Jiang Xuan and Yu Xiaodong

Over the past few years, 69-year-old Ding Baona from the east­ern Chi­nese port city of Qing­dao, has en­joyed an av­er­age 10 per­cent re­turn on her 1.2 mil­lion yuan (US$175,000) in life sav­ings by us­ing a Chi­nese peer-to-peer (P2P) lend­ing plat­form. But in the past months, Ding has be­come in­creas­ingly ner­vous as Chi­nese P2P com­pa­nies be­gan to fall like domi­noes.

Ding con­sid­ers her­self lucky as the P2P com­pany she en­trusted with her sav­ings is still in op­er­a­tion. But mil­lions of in­di­vid­ual in­vestors just like her have al­ready seen their sav­ings wiped out – and Ding is un­sure whether she will still have her money when her in­vest­ment ma­tures in one and a half years.

Ac­cord­ing to the data compiled by p2p­eye.com, an on­line lend­ing re­search com­pany, 251 P2P com­pa­nies were iden­ti­fied as “prob­lem­atic” in July alone, which meant they had trou­ble pay­ing in­vestors, had at­tracted po­lice in­ves­ti­ga­tions for fraud or had their op­er­a­tors flee with client funds.

Be­fore it top­pled in July, Ni­uban­jin was a gi­ant of the in­dus­try with a lend­ing vol­ume of 39 bil­lion yuan (US$5.7B) in­volv­ing some 820,000 in­di­vid­ual in­vestors, ac­cord­ing to the com­pany's web­site. On July 3, the com­pany is­sued its first no­tice of de­fault, and a few days later, lo­cal po­lice in Hangzhou ar­rested six of the com­pany's se­nior man­agers on fraud charges.

The July fig­ure al­most tripled that for June, which saw 84 plat­forms la­beled “prob­lem­atic.” An­a­lysts say this demon­strates the shake-up of China's peer-to-peer lend­ing in­dus­try is ac­cel­er­at­ing at a rapid rate.

But the prob­lems with the on­line lend­ing sec­tor have been sim­mer­ing for the past cou­ple of years. Data from p2p­eye.com shows that by the first week of Au­gust, a to­tal of 4,572 on­line lend­ing com­pa­nies have ei­ther halted op­er­a­tions or been iden­ti­fied as “prob­lem­atic.” Among them, 62 per­cent of fund op­er­a­tors have be­come “un­con­tactable,” in some cases flee­ing with clients' funds, and 21.4 per­cent have en­coun­tered liq­uid­ity prob­lems.

Data col­lected by wdzj.com, which is sim­i­lar to p2p­eye.com, show that by the end of July, 58 per­cent of some 4,000 on­line lend­ing com­pa­nies cov­ered by the web­site had failed.

Rapid Rise and Fall

China's first on­line P2P com­pany, the PPDAI Group, emerged in 2007. Within a fi­nan­cial sys­tem dom­i­nated by banks, par­tic­u­larly State-owned banks that fa­vor large and State-owned en­ter­prises, the emerg­ing P2P com­pany was wel­comed as a fi­nan­cial in­no­va­tion to meet the needs of small and mid-sized com­pa­nies, which ac­count for about 60 per­cent of China's GDP, but only ob­tained 20 to 25 per­cent of bank loans by value.

With­out an ef­fec­tive na­tional credit sys­tem, the sec­tor grew slowly for the first cou­ple of years. By the end of 2010, China only had 10

P2P com­pa­nies. How­ever, when the gov­ern­ment started to en­cour­age the de­vel­op­ment of in­ter­net fi­nance, the sec­tor seemed to boom overnight.

Of­fer­ing an­nual in­ter­est rates of 8-12 per­cent – much higher than the rate for fixed de­posits of less than three per­cent of­fered by most banks – the sec­tor at­tracted a range of in­di­vid­ual in­vestors. In a few years, the num­ber of P2P com­pa­nies had ex­ploded, reach­ing sev­eral thou­sand in 2015. At its peak, it is es­ti­mated the P2P sec­tor was a US$192 bil­lion in­dus­try.

But it was a poorly reg­u­lated one. Scams, il­licit be­hav­ior and Ponzi schemes dressed as lend­ing com­pa­nies flour­ished along­side le­git­i­mate ones in the sec­tor. Ezubao, once the big­gest on­line lend­ing com­pany in China, was re­vealed in 2015 to be a Ponzi scheme that had scammed 74.5 bil­lion yuan (then US$7.6B) from more than 900,000 in­vestors.

The­o­ret­i­cally, the P2P plat­forms serve as a mere in­ter­me­di­ary be­tween bor­row­ers and lenders. But in re­al­ity, as the gov­ern­ment took a hands-off ap­proach to in­ter­net fi­nance, most P2P com­pa­nies re­sorted to rais­ing funds be­fore they had found bor­row­ers. This led many to prom­ise high re­turns from du­bi­ous or non-ex­is­tent projects and then to run off with funds raised from de­pos­i­tors.

‘Reg­u­la­tory Is­sue’

Amid a pub­lic back­lash, the au­thor­i­ties fi­nally started to tighten reg­u­la­tion in 2016, while clamp­ing down on il­le­gal and risky be­hav­iors. In­terim mea­sures launched in Oc­to­ber 2016 banned the plat­forms from pool­ing funds, and re­quired them to es­tab­lish cus­tody ac­counts with com­mer­cial banks and to fully dis­close their use of de­posits by the end of June 2017.

Ob­vi­ously, these mea­sures were not ef­fec­tively im­ple­mented. Ac­cord­ing to a re­port is­sued by the State-owned China In­ter­na­tional Cap­i­tal Cor­po­ra­tion (CICC), three in five on­line lend­ing plat­forms still in op­er­a­tion do not have cus­tody ac­counts with com­mer­cial banks.

“It is mainly a reg­u­la­tory is­sue,” Liu Jun­hai, a Pro­fes­sor of Law and Director of the Busi­ness Law Cen­ter at the Ren­min Univer­sity of China told Newschina. “It is a re­sult of a men­tal­ity of the au­thor­i­ties that pri­or­i­tizes de­vel­op­ment and growth over su­per­vi­sion and reg­u­la­tion,” Liu added.

This re­mains true even af­ter the au­thor­i­ties started tight­en­ing the screws on the sec­tor. Ac­cord­ing to 2016 mea­sures, on­line lend­ing com­pa­nies must reg­is­ter with pro­vin­cial and lo­cal fi­nan­cial reg­u­la­tory au­thor­i­ties, which were ex­pected to com­plete a re­view of lo­cal P2P plat­forms and for­mu­late reg­u­la­tory poli­cies based on re­gional con­di­tions.

This has not hap­pened. As many pro­vin­cial and lo­cal gov­ern­ments face se­ri­ous debt prob­lems, they ap­pear re­luc­tant to curb the de­vel­op­ment of P2P lend­ing sec­tors, which are deeply in­volved in the real es­tate sec­tor, which it­self has been a ma­jor rev­enue source for the pro­vin­cial and lo­cal gov­ern­ments.

On the con­trary, the reg­is­tra­tion of lend­ing plat­forms with lo­cal au­thor­i­ties has been in­ter­preted as proof the gov­ern­ment has rec­og­nized the qual­ity of the com­pany – some have hinted that reg­is­tra­tion means the lo­cal gov­ern­ments guar­an­tee their liq­uid­ity.

Del­i­cate Bal­ance

As in­terim mea­sures ap­peared to have failed, China's au­thor­i­ties opted for a crack­down. On June 14, Guo Shuqing, head of the pow­er­ful China Bank­ing and In­sur­ance Reg­u­la­tory Com­mis­sion (CBIRC), China's new fi­nan­cial reg­u­la­tor, warned at a fi­nan­cial fo­rum in Shang­hai that in­vestors should place a ques­tion mark on any fi­nan­cial prod­ucts that prom­ise an in­ter­est rate of six per­cent or more, clearly re­fer­ring to the on­line lend­ing sec­tor.

“If the in­ter­est rate is over eight per­cent, it will be highly dan­ger­ous; If it is over 10 per­cent, you should ex­pect to lose your prin­ci­pal,” Guo said.

On July 9, the Peo­ple's Bank of China (China's cen­tral bank) and other top fi­nan­cial reg­u­la­tors held a meet­ing on how to man­age the P2P sec­tor. Ac­cord­ing to Pan Gong­sheng, vice gov­er­nor of the bank, the dead­line for re­view of all P2P plat­forms by lo­cal au­thor­i­ties has now been post­poned. But Pan pledged the au­thor­i­ties would es­tab­lish a per­ma­nent mech­a­nism to deal with the risks in­volved in in­ter­net fi­nance within “an­other one or two years.”

On July 16, the CBIRC held an­other meet­ing. While no of­fi­cial doc­u­ments were re­leased, sources told Newschina the au­thor­i­ties dis­cussed es­tab­lish­ing an exit mech­a­nism to al­low P2P lend­ing com­pa­nies to grad­u­ally “exit” the sec­tor. Such ef­forts are al­ready un­der­way in some places. In Bei­jing, au­thor­i­ties have is­sued a “guide­line” to on­line lend­ing com­pa­nies on how to exit the in­dus­try, and started to es­tab­lish a white-list mech­a­nism in the sec­tor.

The new ap­proach may re­flect grow­ing concerns over the fi­nan­cial risks posed by the sec­tor. Although P2P lend­ing re­mains a rel­a­tively small part of China's fi­nan­cial in­dus­try, there are concerns that its col­lapse could trig­ger sys­tem­atic shock – par­tic­u­larly when the gov­ern­ment tries to tighten mone­tary pol­icy, lead­ing to a tight­ened credit en­vi­ron­ment, which is be­lieved to have kicked off the spate of P2P lend­ing com­pany fail­ures in the past cou­ple of months.

Yin Zhen­tao, Deputy Director of the Re­search Cen­ter for Fi­nan­cial Law and Reg­u­la­tion at the Chi­nese Academy of So­cial Sci­ences told Newschina the au­thor­i­ties aim to have most on­line lend­ing com­pa­nies leave the sec­tor in an or­derly fash­ion, in or­der to defuse the fi­nan­cial risks the sec­tor poses, while also pre­vent­ing its sud­den col­lapse.

Ac­cord­ing to China In­ter­na­tional Cap­i­tal Cor­po­ra­tion, only one­tenth of P2P lend­ing com­pa­nies – less than 200 – are likely to be in busi­ness in three years.

But since there is no de­tail on this pro­posed exit mech­a­nism, it is un­clear how that would im­pact the fi­nan­cial mar­ket and in­vestors. Ac­cord­ing to the data compiled by p2p­eye.com, of the 4,500 lend­ing plat­forms which have halted op­er­a­tions since 2007, only 1.15 per­cent of them have ex­ited the in­dus­try with­out is­sues.

For mil­lions of in­vestors across China, the next few years will be a time of anx­i­ety, if not pain.

Newspapers in English

Newspapers from China

© PressReader. All rights reserved.