China economy

Beijing to take action to tackle P2P lending, stock market leverage risks amid trade war

Regulator focuses on deleveraging campaign risks to stabilise economy

PUBLISHED : Monday, 27 August, 2018, 7:54pm
UPDATED : Tuesday, 28 August, 2018, 2:05pm

Beijing will take urgent action to contain two of the most acute financial risks facing the country, as the top leadership seeks to stabilise the domestic economy amid the ongoing trade war with Washington.

Following a special conference of officials in Beijing, the Financial Stability and Development Commission (FSDC), the country’s top financial regulator, called for urgent steps to clean up inadequately capitalised internet-based lending platforms as well as prevent a potential massive sell-off of listed company shares due to the government crackdown on excessive lending-based risks in the financial system, state-run Xinhua reported on Monday.

China is said to start fresh round of checks on P2P lenders

All levels of government must help create a full inventory of the thousands of peer-to-peer (P2P) internet lending platforms in the country and their respective risks, according to the commission, which is headed by Vice-Premier Liu He, the top economic adviser to President Xi Jinping.

Solutions for cleaning up the P2P lending platforms can differ based on local conditions as long as the problems are tackled effectively, the commission said. New standards governing internet-based lending will be drafted as part of a long-term regulatory mechanism, it added.

In late July, the Politburo, the top decision-making body, called for the government to take steps to stabilise the economy, investment, finance and employment.

Monday’s statement from the financial regulatory body focuses more on the effects of the government’s deleveraging campaign rather than its causes. In its previous statement on August 3, it ordered a “continuing crackdown on illegal financial activities and financial institutions to protect the interests of investors and safeguard financial and social stability”.

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Lu Zhengwei, chief economist at the Industrial Bank, said the conference and the regulator’s statement were evidence that the government’s risk prevention goal had not been sidelined.

But the authorities would in future control the pace of de-risking measures to better achieve the goals without creating new risks, Lu added.

“[Beijing] is paying more attention to the risks of de-risking,” said Zhou Hao, a senior economist at Commerzbank in Singapore.

Thousands of P2P platforms have sprung up across the country in recent years, as its shadow banking system mushroomed. They took in capital from retail investors with promises of higher returns than banks, and largely lent to capital-thirsty private firms that did not otherwise have access to credit. Most are not licensed and therefore became targets of the government’s campaign to curb risky lending activity.

The government effort forced many peer-to-peer lending platforms out of business – about 165 of them collapsed in July alone. This wiped out the savings of thousands of retail investors, some of whom have taken to the streets in Beijing and Shanghai this month demanding the authorities help them get their money back.

Li Ying, an analyst with the Bank of Communications, said P2P-related fraud had largely been resolved after a two-year government crackdown, but many of the remaining platforms were now facing a liquidity crunch because of the government de-risking effort.

“It is necessary to control the pace [of the crackdown] to rebuild confidence in the sector and guide market expectations,” she said.

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Over-leveraged stock market investors pose the other risk addressed by the commission. Many investors have borrowed heavily to buy more stocks, pledging previous stock purchases as collateral for the loans. When the prices of the collateral stocks fall, these investors may be forced to liquidate stocks quickly to repay their loans. This risks turning a drop in stock prices into a rout.

And stock prices have been in a downward trend. The benchmark Shanghai Composite Index has fallen to its lowest level since the market collapse in the summer of 2015, hit hard by the trade war with the United States. The index dropped more than 3 per cent immediately after US President Donald Trump announced tariffs on US$50 billion of Chinese merchandise in mid-June.

“We must fully implement market mechanisms to prevent and resolve the risk posed by the pledging of stocks of listed firms. Local governments and regulatory departments should create a better market environment, encourage and help market entities to actively tackle these risks,” the commission said.