Panic Roils China's Peer-to-Peer Lenders
China’s savers are rushing to pull money from peer-to-peer lending platforms, accelerating a contraction of the $195 billion industry and testing the government’s ability to maintain calm as it cracks down on risky shadow-banking activities.
In some cases, savers are turning up at the offices of P2P operators to demand repayment, spooked by reports of defaults, sudden closures and frozen funds. At least 57 platforms have failed in the past two weeks, adding to 80 cases in June, the biggest monthly tally in two years, according to Shanghai-based Yingcan Group. The researcher defines failed platforms as those that have halted operations, come under police investigation, missed investor payments, moved into other businesses, or had operators flee with client money.
“Investors have lost confidence in the smaller platforms, because they have no idea if those companies will survive,” said Dexter Hsu, a Taipei-based analyst at Macquarie Capital. Only a handful of the 2,000 or so remaining firms are likely to endure, he said.
China’s P2P industry, the world’s largest, is one of the riskiest and least-regulated slices of the nation’s sprawling shadow-banking system. A government clampdown has weighed on P2P platforms for two years, but the pressure intensified in recent months after China’s credit markets tightened and the banking regulator issued an unusual warning to savers that they should be prepared to lose all their money in high-yield products.
The shakeout has cast doubt on the listing plans of several P2P lenders and underscores the delicate balancing act faced by China’s government as it tries to reduce moral hazard in the financial system without triggering a crisis. While there’s little sign that the P2P turmoil has spread to systemically important wealth-management products issued by banks, much of China’s $10 trillion shadow-lending system faces the same headwinds of rising defaults, slowing economic growth and official calls to end to implicit guarantees on risky investments.
The China Banking and Insurance Regulatory Commission didn’t respond to a faxed request for comment.
China’s P2P platforms have about 50 million registered users and 1.3 trillion yuan ($195 billion) of outstanding loans, most of which have short maturities. Normally, savers have to wait for loans facilitated by the platforms to mature before getting their money back. But some are now trying to exit early by selling their rights to others at a discount, or by going to the platform’s ofices to demand repayment.
When P2P lender Qian88.com shut last week, it cited “spreading panic among investors” as one of the reasons. Local police were called in to ensure order as customers rushed to the company’s Shenzhen office to demand their money. Another platform, Lqgapp.com, suspended operations last week after some investors talked about difficulties securing repayment in online chatrooms, triggering a flood of withdrawal requests. The platform said it will “attempt” to repay its users over the coming three years. About 220,000 investors are owed about 5 billion yuan.
Shutting up Shop
David Gao, 30, who works in the financial industry in Beijing, invested 1 million yuan of of his savings in P2P loans facilitated by a Hangzhou-based platform in November and has been unable to retrieve his principal and interest. After traveling 700 miles to the company’s office with other investors last week, he found it deserted.
“I won’t invest in P2P platforms any more, I no longer trust them,” said Gao, who had been putting money into online loans for about four years. “I have to move on no matter how upset I am, but a lot of the other investors are old and are suffering more.”
The turmoil is also hurting companies and individuals who have relied on P2P platforms for financing. They include cash-strapped small businesses seeking working capital, individuals without a credit history, and, more recently, leveraged stock market investors and home buyers in need of down-payments.
Some P2P platforms were also raising funds illegally for their own use, while others were running Ponzi schemes that collapsed when the flow of new money halted, regulators have said. That helps explain why authorities have so far been steadfast in cracking down.
The government introduced a complex registration process in December to clean up the sector, with officials in Shanghai identifying 160 problem areas such as overly high interest rates, misuse of funds and exaggerated return figures.
Last month, China Banking and Insurance Regulatory Commission Chairman Guo Shuqing warned that any savings or investment product with promised returns of more than 8 percent is likely to be “very dangerous” and that investors should be prepared to lose all their money if advertised returns exceed 10 percent. The average yield on P2P loans was 10.2 percent in the first half, official figures show. Reported default rates vary from zero on the best platforms to 35 percent on the worst, according to National Internet Finance Association of China.
Authorities have yet to publish the time frame for formally registering P2P firms, meaning the sector is operating in a kind of regulatory limbo, according to Macquarie Capital’s Hsu.
That uncertainty is reflected in the stock market, where P2P lenders have slumped and initial public offerings from the industry have dried up. The U.S.-listed shares of PPDAI Group Inc. and Yirendai Ltd., among China’s biggest P2P lenders, have tumbled 38 percent and 53 percent this year, respectively. China Rapid Finance Ltd. fell 7 percent on Monday, extending this year’s decline to 68 percent. No major Chinese fintech companies have completed IPOs in 2018, despite plans by firms including 9F Group and Weidai Hangzhou Financial Information Service Co. to raise about $8 billion, according to data compiled by Bloomberg.
Even for leading P2P players, a shrinking investor base, rising defaults and higher funding costs will pose “enormous challenges,” China International Capital Corp. analysts Yao Zeyu and Pu Han wrote in a July 13 report.
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How peer-to-peer lending turned middle-class Chinese dreamersinto angry protesters
One would-be protester skulked on the streets around theWestin Hotel in Beijing’s financial district until 3 am, heading back only whenpolice had finished their searches. Another, Alex Li, carpooled part of the wayfrom northern Harbin province to avoid police surveillance on public transport.
The two were among thousands of middle-class Chinese fromall over the country who were trying to make it past China’s high-techsurveillance to demonstrate in Beijing’s financial district on Monday (August6). It was the latest flare-up ofresentment among Chinese people aspiring to live a better life and beingthwarted.
In recent years, many in China’s middle classes poured theirsavings into peer-to-peer lending platforms, known as P2P for short, drawn in bypromises of high returns. But amid a larger effort to curb financial risk toChina’s economy, financial regulators tightened rules for these platforms,leading many of them to collapse without returning investor money. In Li’scase, the main stakeholders of Yonglibao, which he had put his money into,suddenly disappeared in mid-July (link in Chinese), he told the South ChinaMorning Post. By the time its founders abandoned its offices, the platform hadamassed a transaction volume of 7.6 billion yuan ($1.1 billion). The otherprotester told Quartz he had lost the equivalent of $50,000 on a platformcalled iqianjin.com—its name is Love Money, though it can also be understood as“Get Ahead” or “Money Coming.”
Both hoped a protest in Beijing would compel the governmentto help people recover their money from the dozens of P2P platforms thatstopped allowing fund withdrawals last month. Instead, they were foiled byhundreds of uniformed police who locked down the area, patrolling corners nearthe offices of the central bank and securities regulators, and checkingidentity cards. More than 120 buses were brought to the area to take thestealth protesters away, according to a reporter with AFP.
“P2Pfinally turned from ‘peer-to-peer’ to ‘police-to-people,'” wrote one commenter.
Quick money guaranteed by the government?
The platforms might look like scams now, but they were oncepromoted as innovative financial tools by high-ranking Chinese officials andbig tech firms. Persuaded, many people, including single mothers and youngpeople trying to raise the money to buy an apartment, poured their money intothem.
Back in 2015, China’s premier Li Keqiang and former governorof China’s central bank Zhou Xiaochuan both publicly endorsed (link in Chinese)P2P as a way to develop internet finance and support small-to-mediumbusinesses. Compared to the traditional banking system, P2P has a lowerinvestment threshold for savers, while offering borrowers without much credithistory the chance to raise funds more easily. The public support for thesector, coupled with word-of-mouth referrals, drew in millions of small lendersand helped make China the biggest P2P lending market in the world, with 1.2trillion yuan ($175 billion) in loans outstanding as of 2017 (paywall).
That was the year two major players in the sectorIPO’d—including one of its oldest, PPDai, founded in 2007.
The number of P2P firms went from 10 in 2010, to more than3,000 in 2015, according to a June research report from Singapore-based DBSBank. But as more and more players got into the market, some began promisinginterest rates much higher than competitors. Compared with an interest rate ofless than 2% in Chinese banks, many P2P platforms promised a return of 10%(link in Chinese). They also began promising investors better returns if theygot more people in their network to invest in the P2P platforms.
One P2P platform went as far as promising profits of up to60% (link in Chinese) before the founder fled and the platform failed to payback (link in Chinese) more than 200 million yuan ($29 billion) in June. Thatmonth, Guo Shuqing, chairman of China Banking and Insurance RegulatoryCommission, issued a stark warning (paywall): “You should question when therate is above 6%, [a rate above] 8% is a dangerous signal, and you can prepareto lose all deposits if it’s more than 10%.”
The truth is, this was risky lending—according to the DBSreport, the typical P2P borrower is likely to be between the ages of 20 and 39,earning between $300 to $1200 a month, and with little credit history. Lack oftransparency regarding how the platforms were using pooled money for loans madeit hard for investors to judge what was happening—and the controlled nature ofChina’s internet may also have played a role.
“The averageChinese citizen is operating without complete information and that fuels a lotof what we see as very risky behavior,” said Jehan Chu, founder of HongKong-based Kenetic Capital, a cryptocurrency investment and advisory firm, whoclosely tracks China’s financial framework. “Because of the Great Firewallthere is just less information—that’s not just a judgement, that’s a fact.”
Caught up in China’s risk clean-up
Zhang Xue, a 47-year-old single mother who invested in P2Pplatforms with the money her husband left after he died of a heart attack, tolda domestic news site (link in Chinese) that she had lost all her life savingsof 3.8 million yuan ($550,000). “In more than 40 years, I have never regrettedand blamed myself like today. I feel that by coveting high-interest rates I’vepushed my child into a dead end,” said Zhang, who now can’t afford her child’stuition fees.
She is one of 400 victims of the collapse of Touzhijia, a P2Pplatform that went bankrupt last month with 26 million yuan ($3 million) (linkin Chinese) in debts. Touzhijia is one of 221 P2P platforms (link in Chinese)that shuttered in July, compared with 217 such cases in all of 2017, accordingto industry monitoring service site Wangdaizhijia (Online Lending House).
The uptick comes after China began tightening rules forpeer-to-peer lenders in August 2016 as part of an overall effort to reducesystemic financial risk and speculation, and regulate the shadow bankingsector. These efforts have included curbing capital flows by Chinese businessgroups overseas into irrational investments, banning cryptocurrency exchangesand coin offerings, and trying to cut the debt of inefficient state-runorganizations. Stricter regulation was also a response to previous cases ofinvestor fraud—for example, the case of Ezubao, a P2P site that was shut downby authorities in early 2016. Nor is the tightening over yet.
“The Chinesegovernment since July has launched a series of new financial regulations, andwill likely release more (including further regulations for the P2P lendingindustry) in the coming weeks,” Yuanxin Liao, a Shanghai-based associateanalyst at consulting firm Control Risks, told Quartz via email. “The concernsof the protestors, as well as the many investors exposed to the same risks, arevery likely a key consideration in the policy drafting.”
To pass a review initiated by Beijing, firms had to show theyhad appointed a custodian bank to oversee funds, and that they were making fulldisclosures on fund use, among other things. The deadline to pass the review wasJune this year, with more and more firms closing as the deadline approached. Asnews of shutdowns spread, panicked investors began withdrawing their deposits,setting off a vicious cycle. Forinstance, when lending platform Qian88.com suspended its service in July, aflood of citizens flocked to (paywall) the company’s Shenzhen office towithdraw their money, and police had to be called in to maintain order,according to Bloomberg. Several platforms, including Touzhijia (link inChinese), are under police investigation. The DBS report said the shakeout could see the number of P2P platformsreduce from around 1,800 at present to 300.
In desperation, people from all parts of China begansurreptitiously organizing to make it to Beijing. Protesters in China are takingenormous risks, such as facing detention, and constant scrutiny in thefuture—even if they don’t manage to hold their protest. WeChat and other chatapp groups formed by investors were identified and blocked, and participantswere barred from purchasing air and train tickets. Yet accounts from multiplenews reports and social media suggest thousands may have managed to make it toBeijing.
Ahead of the planned protest, a Twitter account whose namemeans “Financial Refugee” posted a letter (pdf, link in Chinese) on behalf ofthe troubled investors, saying protest was their only recourse after theircomplaints had gone unanswered by authorities.
“We can’thelp but ask, the P2P online lending platform originated in Europe and America,why is it only in China that so many of them turn bad?” said the letter.“Ironically, a policy backed by official guidance has led to financial turmoilfor tens of millions of families.”
