China’s scandal-plagued P2P sector faces ‘continued pressure’ in 2020 amid tightening regulation

Once seen as a valuable source of credit for vulnerable consumers and businesses, China’s peer-to-peer (P2P) lenders have been embroiled in a wave of scandals
The internet-based lending industry faces ‘further industry contraction’ amid increased regulatory and capital requirements in 2020, analysts say

China economy

Amanda Lee

Published: 4:30pm, 7 Jan 2020

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China's peer-to-peer lending market looks for further disruption this year with more platforms likely to be shut down as regulators attempt to rein in the scandal-plagued sector despite huge demand for credit from small businesses and individuals.

The peer-to-peer (P2P) industry has emerged as a valuable source of credit for vulnerable consumers and businesses that cannot access loans through the traditional banking system, although the internet-based lending platforms still only make up a small amount of borrowing in the country.

But following a wave of scandals that wiped out the savings of millions of Chinese investors who had tried to capitalise on high interest rate returns, the number of P2P platforms has shrunk dramatically in recent years.

“The increased regulatory and capital requirements for China's P2P lenders should continue to put pressure on the sustainability of business models across the sector in 2020, leading to further industry contraction,” said Katie Chen, director for non bank financial institutions at Fitch Ratings.

The increased regulatory and capital requirements for China's P2P lenders should continue to put pressure on the sustainability of business models across the sector in 2020, leading to further industry contraction

Katie Chen

Tighter regulation saw the number of P2P services plunge to 343 in 2019 compared to 2,680 in 2016, with more than half of the platforms now based in Beijing. Gansu, Hebei, Hunan, Chongqing and Sichuan were among the provinces that ordered a complete shutdown of P2P lending last year.

In November, Beijing ordered all existing P2P platforms must meet new regulatory requirements within two years.

The increased regulation has seen total outstanding loans shrink to 491.6 billion yuan (US$70.4 billion) as of December last year from its peak of 1.32 trillion yuan (US$189.2 billion) in June in 2018, according to research from industry data provider Wangdaizhijia.

The abrupt expansion of China’s online lending and its quick collapse has showcased the high risks that go hand in hand with the Chinese market where the mood in Beijing can change overnight to create or kill an industry, analysts said.

“Money has dried up because the regulators took needed steps to rid the nonbank lending sector of too rampant fraud and abuse,” said Peter Fuhrman, chairman and chief executive of China First Capital, an investment bank based in Shenzhen. “Good operators got punished along with scoundrels.”

Money has dried up because the regulators took needed steps to rid the nonbank lending sector of too rampant fraud and abuse

Peter Fuhrman

Ezubao, once China’s biggest P2P lending platform, folded in 2016 having collected 59.8 billion yuan (US8.5 billion) from more than 900,000 investors.

The collapse of Ezubao and a number of other high-profile lenders, some of which promised returns three to four times higher than banks, sparked grievances across China and protests outside the headquarters of the banking and insurance regulator in Beijing. Local media reported cases of people committing suicide after losing their life savings, triggering a public outcry that led to concerns among officials that the P2P crisis could become a liability for the government.

In November, China’s Internet Financial Risk Special Rectification Work Leadership Team Office, a task force set up to eliminate risks in the online lending sector, released a notice aimed to transform the P2P industry.

On paper, the new measures could be a turning point for the sector and help small borrowers to secure funding while strengthening protection for investors.

The regulatory guidance requires companies to meet a minimum registered capital level of 1 billion yuan (US$143 million) to receive an online microlending licence to operate nationwide – the same requirement for commercial banks.

What is more, online microlending companies have to rely on funding from institutions and cannot grow their business using investment from small investors. The guidance will also impose a strict leverage limit for microlending companies. Fitch Ratings believes that the new funding requirements are likely to be a “growth constraint” for many P2P lenders.

But the demand for loans among small businesses and individuals shows no signs of abating. Consultants Frost & Sullivan forecast P2P lending to grow in value to 2.17 trillion yuan (US$311 billion) by 2023, compared to 789 billion yuan (US$113 billion) in 2018.

Yang Kaisheng, former president of state bank ICBC, told a forum in Hainan province last month that Chinese regulators need to learn from their mistakes in acting too slowly in tackling the risks in P2P lending.

“If six or seven years ago when the first wave of internet finance was starting to heat up, if there were regulations being suggested then, even though they might not be very mature, they might be a bit sketchy, it would have been much better than what happened years later,” said Yang.

This article appeared in the South China Morning Post print edition as: P2P loan platforms set for more woes in 2020

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