Nationwide crackdown takes its toll on China’s P2P and internet finance industry

P2P platforms are dying out as authorities slam on the brakes in the wake of financial scandals involving billions of yuan

PUBLISHED : Friday, 13 May, 2016, 6:12pm
UPDATED : Friday, 13 May, 2016, 7:31pm

China’s peer to peer (P2P) lenders are bailing out from the luxury office buildings they once occupied as part of their high-end image, as the nation’s internet finance industry, once the hottest ticket in China’s financial circles, undergoes turbulent changes brought about by a nationwide crackdown on fraud in the sector.

On the 31st floor of Taiping Finance Tower, a financial landmark at the heart of the central business district (CBD) area in Shenzhen and right next to the new Shenzhen Stock Exchange building, the office formerly leased to the problematic P2P company Ezubao has been transferred to GF Securities, one of the most prominent securities companies in the Chinese market.

Another office formerly occupied by Ezubao in the same building, but on the 41st floor, is still vacant, pending a new tenant.

“Some high-end office buildings do not welcome P2P companies now. They worry that potential fraud from this sector would hurt the image of the building,” said Hu Qiang, a property agent handling office rental clients in the Futian district of Shenzhen.

“More than 30 per cent of the P2P companies closed down in the first quarter, or retreated from the CBD area. The leasing rate has dropped in some buildings, a rare situation for Shenzhen, where high-end office buildings have always been in short demand,” he said.

Some high-end office buildings ... worry that potential fraud from this sector would hurt the image of the building
Hu Qiang, Shenzhen property agent

A report issued by Cushman & Wakefield in late April noted that because of the tighter supervision over P2P platforms “vacancy rates in Grade A office buildings in the Futian and Luohu districts in Shenzhen went up in the first quarter, as a rising number of P2P companies closed up or surrendered their tenancy”.

The number of P2P platforms under so-called “normal operation” in China has declined for five months in a row to 2,431, a drop of 7 per cent from the peak in last November, according to industry data provider WDZJ.

Up until April this year, WDZJ found that 1,598 P2P platforms, almost 40 per cent of the total P2P companies it tracked, had either shut down, defaulted on repayments, or the people in charge disappeared. But industry insiders said the real situation was worse.

“A lot of small P2P companies are shutting down. They are not followed by industry data providers. Even for big ones under ‘normal operation’, many have stopped issuing new lending projects due to a recent top-down crackdown on the sector,” said Vivian Wei, a start-up founder who suspended an online derivative sales business last month.

Since mid April, a task force made up of a number of government departments under the State Council has started a one year rectification programme to clean up the internet finance industry.

Specifically, local police, industry and commerce authorities are banning P2P companies from raising funds for their own projects or guaranteeing loans.

There is also a crackdown on maturity mismatch in P2P lending – where the loan maturity of investors is not in line with the investment maturity – and on “fund pools”, in which investor funds are combined into a single pool instead of being matched with specific loans.

A flood of fraud cases from China’s thriving internet finance sector has shaken the country since late last year. In January, high-profile P2P lending platform Ezubao, was investigated by police for creating a Ponzi scheme. With 95 per cent of its online lending project faked, the company collected more than 50 billion yuan (HK$59 billion) from more than 900,000 investors across the country.

In early April, police arrested the founder and senior managers of Zhongjin Capital Management, an online wealth management platform, for suspected illegal fundraising and fraud. The company earlier had announced its assets under management surpassed 30 billion yuan. It is still unknown how much of that amount is in losses.

Former senior managers of these now discredited companies confess that they had been luring clients to believe in their magical investment capabilities with lavish lifestyles, advertisements in mainstream media, as well as fancy offices in landmark business buildings across the nation.

With the ongoing public exposition of similar fraud cases, these old tricks are losing their appeal as people are becoming more and more sceptical towards these platforms that flourished overnight, promising guaranteed investment returns above 10 per cent.

As the central government and local authorities roll out their unprecedented clean up campaign, companies in this sector are suffering the worst time – regardless of whether they are good or bad, or run with integrity or backed by swindlers.

One problem is the lack of clear industry guidelines or laws regulating entry barriers to the industry and clarifying what can and can’t be done by those running P2P lending, equity crowd funding, wealth management, and online payment businesses.

Zhang Guodong, secretary general of the Shenzhen Internet Financial Association, said the idea behind the current regulatory crackdown was firstly to keep newcomers out of the business, and secondly to clean up the existing market players.

“Different local authorities have their own yardstick. For Shenzhen, the municipal government has in particular put a lid on crowd funding platforms targeting housing investments,” he said.

Shenzhen and other local authorities in Shanghai and Beijing have suspended registration of new companies with the name containing words like “finance”, “P2P” and “online lending”.

As for existing companies, local regulators, particularly the administrations for industry and commerce – a government organ responsible for business registration – and local police have been looking into business models, shareholder structures and financial positions.

Meanwhile, promotional activities including celebrity endorsements and media advertisements by companies involved in the above businesses are also banned.

Many retail investors complain that they put their trust in the fraudulent platforms because of their advertisement on China central television, or in local party-run papers.

Abner An, joint founder of Daokoudai.com, a Beijing based P2P platform, said the “growth environment” for P2P companies has drastically changed in the past few months.

“There was no entry barrier to start a P2P business before. Spend 40 yuan to buy software from Taobao, and you could start the online lending business with no regulator watching you – that’s why there were so many fly-by-night swindles,” he said.

“It is impossible that those [bad] teams could survive under today’s regulatory crackdown. Even for good teams, it takes time to figure out the regulatory outlook and decide the next step,” he said.

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