China’s peer-to-peer lenders are struggling to survive
SHANGHAI – China’s peer-to-peer lenders face a Darwinian struggle for survival in 2019, with the number of operators expected to drop dramatically for the second year in a row given the government’s ongoing crackdown on these private online financial services providers.
Beijing’s efforts to curb over-indebtedness and comply with more stringent regulations have resulted in the closure or collapse of hundreds of P2P lenders. In 2018, the number of lenders fell 52% to just over 1,000, with their combined loan balance falling 20%.
This year, Chinese research specialist Wangdaizhijia predicts that the number will drop to 300 to 500 by the end of 2019. Pressure on the industry is expected to accelerate acquisitions by large lenders.
Online lender Modai collapsed late last year; The door to his abandoned office is plastered with a notice that the financial regulators are investigating him. Individual investors who put 1 billion yuan ($ 149 million) of their cash into the company, whose name means “magic pocket,” wonder if they will ever see their money again.
Peer-to-peer lending platforms that match people who have money with those who need it were introduced in China around 2015. Industry leader Weidai lures lenders with hooks like “BMW used as collateral. One-month rate” at annualized 5%. “
These platforms upload asset information after verifying vehicle registration and identification of borrowers. Borrowers are often self-employed or small and medium-sized business owners who have difficulty obtaining credit from banks. Occasionally, peer-to-peer lenders bundle loan applications and solicit capital from investors for the package.
Unsecured loans are offered at annual interest rates of 8% to 10%, and the platforms are a tempting investment vehicle for people who have been looking for an investment opportunity for their money since the collapse of the stock market bubble in summer 2015. Banks are considered to be safer, but typically only bring 4 to 5% per year.
The online loan market has grown rapidly. In 2015 there were nearly 3,500 peer-to-peer lenders. At the end of 2017, they had more than 1 trillion yuan in outstanding loans.
The tide turned last year after President Xi Jinping’s government decided to curb excess credit, even if it meant slower economic growth. Xi was concerned that ailing companies continued to turn to online lenders in addition to widespread fraud in the industry.
The government ordered banks to scrutinize loans to peer-to-peer lenders, 80% of whom allegedly have not segregated their working capital from funds under management. Since the volume of brokered deals with many lenders is only around 1 billion yuan, a market shakeout is inevitable if the banks tighten their credit checks on them.
While some peer-to-peer lenders are pure Ponzi schemes, a sizable number collapsed in 2018 due to a liquidity crisis. Until the middle of last year, Modai was expected to first repay investors before liquidating itself.
The number of peer-to-peer lenders in China has fallen two-thirds from its peak, while the loan balance has fallen below 800 billion yuan. There are around 10 major peer-to-peer lenders listed inside or outside China, and consolidation, led by companies like Weidai, Yirendai and the PPDAI Group, is likely to accelerate.
Regulators have pushed for market shakeout to discipline the industry after multiple lenders escaped with tens of billion yuan in investor money in 2016 and 2017. However, analysts say the hasty pace of consolidation has hurt the economy.
Cautious investors are moving away from the stock market. The closely watched Shanghai Composite Index fell to its lowest level in more than four years in early January and has yet to rally sharply despite the government’s aggressive stimulus measures.
At a time when China faces a slowing economy and a trade war with the US, the side effects of the government’s approach to peer-to-peer lending could persist.