P2P maintains its appeal as China redraws financial system

The scandal-hit lending sector could be set for a comeback, buoyed by people’s growing interest in digital banking

PUBLISHED : Friday, 17 June, 2016, 8:21pm
UPDATED : Friday, 17 June, 2016, 8:21pm

As the recent scandals arising from fraudulent peer-to-peer lending practises continue to batter the mainland’s finance industry, uncertainty surrounds the country’s plan to reshape the banking system.

To assuage market fears about a credit crisis following a wave of defaults and collapses involving P2P firms, the authorities have launched a nationwide crackdown on illegal private lending businesses.

It’s a further heavy blow to the P2P sector, which was being touted as a future jewel in the crown of the mainland’s finance internet sector just two years ago.

Strong rumbles of thunder were heard in China after the recent scandal involving the ethics and practises of leading executives at Lending Club, a US-based P2P behemoth launched in 2006 to allow individuals make and apply for loans through an online lending platform.

That sorry saga could also now slow down the initial public offering pace of the mainland’s top P2P players, with pessimistic industry executives predicting that none would be able to raise funds on the US stock market this year, as worries about risk still weigh on investors.

It would be wrong to just simply sign a death warrant on P2P.
Zhejiang Panyuan law firm chief Yan Yipan

“But opening your mind to optimism can help you seize the opportunities ahead,” said Zhejiang Panyuan law firm chief Yan Yipan.

“It would be wrong to just simply sign a death warrant on P2P.”

One of the earliest advocates for legalising underground banks in Wenzhou, Zhejiang province, Yan added that thorough and meticulous studies should be conducted by regulators and law-enforcement authorities to pave a way for healthier growth of P2P.

Internet finance, known as financial technology, or fintech in the West, has grown in leaps and bounds since 2013 in China, enshrined by the leadership’s calls to drastically reform the country’s financial system to benefit the majority of businesses and individuals, rather than focusing on serving state-owned corporate giants.

Technically, an online P2P lending platform helps match borrowers and lenders, an information service provider which does not have to rely on its own asset pool.

China’s e-finance sector has been booming since the government’s plan to legalise the underground banking system first emerged.

The sector effectively helped small businesses in Wenzhou prosper, when Chinese-made goods were well received in the global market between late 1990s and early 2000s.

But the system collapsed in 2011, owing to the global financial turmoil, prompting the authorities to map out relevant rules governing the development of private-lending businesses.

P2P emerged to be a facile solution.

At least 2,000 internet finance players sporting the tag ‘P2P’ mushroomed in China between 2013 and 2014 with some bullish company executives predicting the fledgling sector would become a major rival to the mainland’s state-owned banks as they vied for a share of commercial lending in a market where 500 million people were underserved by existing providers.

The notion of P2P was distorted in China, however, after industry officials pointing out that most of the platforms were illegally raising funds from investors to chase lofty interest rates through relending the proceeds to needy businesses and individuals.

Yang Chongyi, the chief risk officer at Chengdui Financial Information, said in early 2015 that at least 10 per cent of payments on P2P loans had been registered as late or become non-performing, adding that a credit crisis would be inevitable.

However, the mainland still lacked a clear-cut legal and regulatory framework governing P2P, and no licenses for P2P businesses were needed to provide lending via the internet.

It was not until July that year that Beijing published a guideline on internet finance firms, which barred P2P players from taking deposits from investors before lending the money to others.

But the new rule wasn’t enough.

Since late last year, dozens of P2P platforms have either failed or been found to have defrauded investors.

Ezubao, one of the mainland’s biggest platforms, allegedly defrauded about 900,000 investors out of more than 50 billion yuan (HK$59 billion).

Bao Lihua, the victim of an illegal peer-to-peer lending scheme, says she used to view counsels of caution by her daughter, as simply a formula for defeat.

The retired Shanghai worker liked betting on high-yield investment products, only to then see a loss of 300,000 yuan from handing the money to an illegal P2P business.

“We chased only high returns although we had no idea what P2P was,” she said.

“My daughter, with good education, had kept warning me of the risks, but I turned a deaf ear to her advice.”

In Shanghai, an intensified crackdown on P2P since April has resulted in a decision by the city’s industry and commerce administration to stop approving new investment firms or businesses whose company names include words such as “financial”, “wealth management” and “fund management.”

Yang agreed a crackdown on illegal P2P businesses was necessary, but warned that pessimism on the whole sector might have been overdone.

Proper regulation and direction hold the key to a successful and smooth P2P operation
Yang Chongyi, the chief risk officer at Chengdui Financial Information

“Proper regulation and direction hold the key to a successful and smooth P2P operation,” he said. “After all, this form of lending, with players cleaving to their organic heritage, benefits the economy and boosts the financial reform.”

On the mainland, Dianrong.com, founded by Lending Club co-founder Soul Htite, and China Rapid Finance, a P2P business aiming to bring affordable consumer credit to emerging middle-class via the internet, are viewed as established technology companies with the ability to quench the financing demands of small businesses and individuals.

Due to banking bias against small companies and individuals, cash-hungry clients often still have to pay high interest with annualised rates up to 20 per cent to access funds on the shadow banking system.

Global consultancy McKinsey, however, said the outlook for China’s fintech sector, after undergoing a “full circle” that included loan defaults, could be set to recover, buoyed by people’s growing interest in digital banking.

More than 70 per cent of mainlanders would choose to open an purely digital bank account, its recent survey showed.

Wealthy mainlanders said they would also dodge banking deposits with benchmark interest rates standing at less than 2 per cent.

Zhu Guangyu, a white-collar employee in Shanghai, said that he would still resort to a big P2P lending business with a solid risk-management track record to chase higher returns for his idled cash.

“Not all P2P platforms are evil,” he said.

“I still favour the online marketplace, as it can safeguard my money, and help me get higher returns than banking deposits.”