China regulator orders bailout of peer-to-peer lenders by managers of distressed assets

PUBLISHED : Friday, 17 August, 2018, 8:02am
UPDATED : Friday, 17 August, 2018, 3:37pm

China’s financial regulator will expand the business scope of the country’s distressed-asset managers, enlisting their help to bail out a corner of the financial system that is in danger of collapsing.

During a Wednesday meeting in Beijing, the China Banking and Insurance Regulatory Commission asked four managers of distressed assets – Huarong, Cinda, Great Wall and Orient – to extend their mandate to non-performing loans owed by peer-to-peer (P2P) lending platforms, according to a source familiar with the matter. The meeting was first reported by Reuters on Thursday.

The bailout comes in the wake of closures of scores of P2P lenders across China this year – their causes range from credit squeeze to mismanagement and outright fraud –that have caused panic and protests by aggrieved investors.

Further Reading: Shanghai savers sound the alarm as more P2P lenders fail to return funds

The government of the People’s Republic is particularly sensitive to public displays of grievance, especially during a time of slower economic growth, a stock market rout and amid a trade war with the US that is not showing any sign of abating.

Concerned that social unrest could get out of hand, the regulator sought out the state-owned asset management corporations (AMCs) to help stabilise the industry. Online lenders must cooperate with traditional banks – the very institutions the P2P platforms sought to disrupt – to work out their financial woes, according to 10 guidelines issued by the regulator.

One solution offered by the regulator was to let Cinda and the remaining three AMCs take over P2P platforms suffering from a credit squeeze, but which have good underlying assets, said the source, who declined to be identified because he is not authorised to speak to the media.

“The state AMCs are the only ones that can help with this difficult situation, which is driving government officials around the clock,” said Nanjing University Business School’s Professor Sun Wujun. “Economic growth is still under pressure. It is not the best time to absorb distressed assets.”

Further Reading: Huarong’s client list offers a peek into how China’s financial ‘crocs and rhinos’ fund their forays

The AMCs were created in 1999 to help China’s four largest state-owned banks – Industrial & Commercial Bank of China, Bank of China, Agricultural Bank of China and China Construction Bank – remove bad debts from their books in the aftermath of the 1997 Asia financial crisis.

After nearly two decades of operations, the AMCs themselves are bloated with distressed assets that they too are struggling to dispose of. Huarong, the largest of the AMCs and a processor of loans for ICBC, had 866.5 billion yuan (US$125.6 billion) in assets in 2015, compared with 14.5 billion yuan in net income.

The AMCs have their work cut out, and it is arguable how much help they can offer to the P2P platforms.

A total of 165 lending platforms stopped allowing investor withdrawals in July alone, locking up hundreds of billions of yuan of capital. Hundreds of P2P proprietors absconded their investors’ cash in July, compared with 65 cases in June, and 10 in May, according to data compiled by Wangdaizhijia, which compiles research on China’s online lending business.

Further Reading: Police thwart protest rallies by victims of China’s underground financial system

Investors are taking their online grievances to the streets, prompting Beijing police to come out in full force last week to shield the capital’s Finance Street – where the central bank and most regulators are located – from angry demonstrators who call themselves the “P2P refugees.”

“It is out of political and social responsibility, not economic sense, that the AMCs are stepping in,” said Sun.