China’s peer-to-peer (P2P) lending industry is in turmoil. In recent months, authorities have ramped up regulatory oversight of the world’s largest P2P lending industry. Investors are losing confidence at their stakes and pulling their funds, diminishing operators’ liquidity; many of them are facing insolvency.
P2P lending, or online lending, is a popular fintech application under which intermediaries gather funds from retail investors and loan the money to small and medium-sized enterprises (SMEs) and individual borrowers. Since these services are almost entirely operated online, they promise higher returns to investment compared to financial products offered by traditional institutions.
Yingcan Group, a Shanghai-based research firm, estimates that half of China’s online P2P platforms disappeared in 2018. They expect 70% of those remaining to be out of business by the end of 2019. If this prediction is true, within the span of two years China’s P2P industry will have shrunk by 85%.
The fact that these platforms are now regulated and that the new rules are having a significant impact on the viability of some of the less well-capitalized or less well-run lending platforms is not surprising, said Zennon Kapron, director at Shanghai-based financial industry market research firm Kapronasia. “It has to happen. There needs to be more consolidation in the industry,” he said.
The rise and fall of P2P
About a decade ago, online P2P lending began flourishing in China. At the time, the country’s consumer credit market was underdeveloped, thus tech-enabled P2P provided an easy financing solution for eager entrepreneurs and small businesses.
The industry had an impressive run for the first few years, staying well below the regulators’ radar. “In the past couple of years, the regulators have taken a lenient approach to regulating fintech in general, and P2P lending in particular,” said Kapron.
At the peak of P2P lending in 2015, there were close to 2,600 of platforms operating in China, according to industry intelligence site wdzj.com.
In the absence of government regulation and a legal framework, problems with fraud started to unravel. In late 2015, Chinese online lending platform Ezubao was revealed as a record-breaking Ponzi scheme worth over RMB 50 billion ($7.6 billion) and involving over 900,000 investors.
Measures to curtail small and medium-sized lending platforms started in 2016. The crackdown has found new force in the government’s renewed efforts to defuse debt bubbles and limit the country’s overall financial exposure. Inevitably, the government’s tightening of financial regulation found its way to the P2P industry.
This week, Chinese police froze RMB 10 billion worth of assets owned by over 380 lenders in a large-scale investigation spanning 16 countries. Dubbed Operation Fox Hunt, the investigation has led to the arrest of 62 suspects implicated in P2P fraud since last June.
As of 2019, over 5,400 platforms have either collapsed or found problematic, involving over 2 million investors in China, wdjz.com estimates. Zhou Hao, chief marketing officer at Fenghuang Finance, an online financial services and wealth management platform set up by the major synonymous TV station, believes that only around 100 P2P lending platforms will survive in the Chinese market.
The total value of the loans managed by online crowdlenders has fallen to RMB 1 trillion. Prior to the clampdown, in 2015, the total P2P loan amount was RMB 1.25 trillion, according to Chinese media (in Chinese).
“It’s going to get worse before it gets better; more regulatory shake out that will take place,” Andrew Polk, founding partner of Beijing-based research firm Trivium, told TechNode. China’s leadership has made financial risk mitigation a top economic priority, in which P2P lending plays a crucial role. Authorities will not back down, at least not in 2019, Polk explained.
Winners and losers
As of January 2019, the number of operational platforms was down to around 1,000, and the value of outstanding loans had ballooned to RMB 177 million, according to wdzj.com data. Officials weren’t quick to realize how aggressively the measures would hit the P2P market.
The authorities’ initial plan was a concerted effort to banish small platforms. “If you look at financial policy in general, the whole game is about shoring up the big guys and pushing the small guys out of the market,” Polk said. The crackdown on online lending runs parallel with the government’s wider financial strategy, he remarked.
Kapron said he expects consolidation to continue throughout this year. The smaller platforms that are not mature or well-capitalized will not survive the winter.
Last July, Bloomberg reported the number of lending platforms that have halted operations or come under police investigation had reached the highest point in two years. Many investors reported to have lost their life savings to lending platforms that went bust. Some took to the streets in protest, hoping the government or majority stakeholders in the defaulting P2P companies would help recover their money.
The crisis shows no signs of retreat, as more P2P lending platforms throw in the towel. In January, Hangzhou-based Xinhehui said it would default on its debt to investors, totalling RMB 860 million—just days after Shanghai based operator Yidai decided to close up shop.
Amid the surge of defaults, larger platforms also encountered setbacks. They too, have to face market consolidation. In recent months, Wall Street banks such as Goldman Sachs and Citigroup walked away from deals with Chinese P2P lenders seeking to be listed in the US stock market.
Kapron said some of these companies are branching out to other services. PPDai, which claims the title of “the first online consumer finance marketplace in China,” is diversifying its services, following Ant Financial’s business model. Lufax, one of the largest lending service platforms in China, is pivoting away from its core business into the growing retail investing market and wealth management.
The industry will eventually stabilize, Kapron said. Platforms either have to adapt to the new rulebook or fail. “It will be interesting to see once all these regulations play out and how many are left to stay,” he added.
“I believe that over the course of 2019 most of the consolidations that are ever going to happen will happen,” mostly through shutdowns rather than acquisitions, Kapron added.