P2P plight shows regulatory woes
The collapse of many online peerto-peer (P2P) lenders in recent months is a bitter reminder that China’s institutions are still unprepared for an individual financial investment boom – and that Chinese consumers still lack the financial savvy to make good decisions in sectors other than the housing market.
That suggests that, in addition to continued and finely paced efforts to eliminate unqualified and illicit lending platforms, and giving greater importance to minimizing P2P investment losses, China should put a priority on establishing a regulatory safety net.
Investors in the world’s largest smartphone market are widely seen as tech-savvy, but they need more time to become truly money smart.
In a sign of mounting problems with P2P lending in China, data from industry portal p2peye.com showed that as of the end of July, lending platforms deemed problematic stood at 4,691, more than double the 1,968 platforms that were still operating. No new lending platforms started in July.
The nation’s P2P sector had outstanding loans totaling 1.1 trillion yuan ($160.5 billion) as of July 31, a substantial decline from 1.22 trillion yuan at the end of June.
With seven out of 10 Chinese P2P lenders not operating, a large portion of investors will face difficulties in getting their money back. They will struggle to cope with loan defaulters or fraudsters.
The sector added 253 problematic platforms last month, according to the statistics. The number seems worrying, compared with an addition of 82 problematic lenders in June.
The plight of P2P investors has prompted the authorities to roll out 10 measures aimed at curbing risks in the sector. Two inter-ministerial working groups given the responsibility to crack down on internet finance risks and online lending risks, respectively, held a joint meeting in recent days. They examined the risks of P2P lending and the response so far, and they proposed the next steps in handling the risks, the Xinhua News Agency reported Sunday.
Local governments have moved swiftly to maintain social and financial stability and protect lenders’ legitimate rights, the report said. The 10 measures laid out at the meeting include requiring local governments to set up “windows for communications” to explain policies and respond to investors’ requests, making compliance checks of online lending platforms, and strictly banning new online finance platforms.
The broad-ranging efforts are expected to help contain risks and recoup investors’ losses. But it should be recognized that the government has been moving to clamp down on irregular and illicit practices in the P2P sector for quite some time, and yet the deadline of June 30 for P2P platforms to comply with new standards was missed. This realization sent shockwaves through the industry amid China’s deleveraging drive and escalating trade tensions with the US.
Many individual investors have gotten involved in the flourishing P2P sector, which is considered as a hallmark of China’s progress in financial innovation. But it’s obvious that the nation’s institutional efforts to create a wellgrounded regulatory framework haven’t kept pace with the online lending boom or Chinese investors’ desperate search for investment conduits with a lower threshold than property investment.
The reality is that the regulators are not moving fast enough, while average investors have been too ambitious. Rather than filing for bankruptcy, executives at many P2P lending firms simply absconded with investors’ money.
Obviously, many P2P platforms aren’t creditworthy if problems emerge. And just as obviously, efforts to provide orderly exit mechanisms for unviable P2P platforms have failed. Banning new P2P platforms is not a fundamental solution, just like suspending IPOs can’t fundamentally solve stock market problems.
An effective approach to the P2P problem would be to create a sound framework that highlights insolvency reforms in China. Investors, for their part, should also be wary of possibly risky P2P investments until the country is institutionally prepared for booms in the stock market or the P2P space.
The author is a reporter with the Global Times. bizopinion@globaltimes.com.cn
In addition to continued and finely paced efforts to eliminate unqualified and illicit lending platforms, and giving greater importance to minimizing P2P investment losses, China should put a priority on establishing a regulatory safety net.