Our regularly scheduled column is having a week off. In its place, may we recommend a look at the TechNode archives? Our suggested topic: P2P lending.
The peer-to-peer lending fad is something a lot of China tech has tried to forget, but, as TechBuzz China’s Rui Ma wrote recently, you can’t understand what’s happening with Ant Group and fintech regulation without it.
The online P2P industry went from the launch of pioneer platform PPDAI in 2007 to the near-total ban of the industry in 2019, leaving behind a trail of angry and duped investors. The decision to put Ant under strict new regulations—forcing it to drop its IPO and drastically changing its business model—likely reflects fears of the consequences of letting finance grow faster than oversight.
Clearly, regulators are once burned, twice shy. But does Ant really have anything in common with the industry a senior police official later called “a disaster zone of fraud”? We’ll be back next week to examine that question with a look at the financial issues in play with new regulations on fintech.
TechNode covered the story from start to finish. Here’s a timeline of the best of our coverage:
P2P lending: 2012-19
- Nov 27, 2012: “2000 peer-to-peer online funding services in China, unregulated”
When we first looked at the industry, it was growing fast: “Over 2000 online peer-to-peer funding services reportedly have processed RMB 20 billion ($323 million) worth of transactions in this year, twenty times of that in last year.” But the risks were already apparent, with thousands of unregulated companies taking investors’ money—and a few already charged with fraud.
- Jul 31, 2013: “Lending Club co-founder established Shanghai-based P2P funding service Dianrong”
The next year, we first met industry leader Dianrong, and its pedigreed founder Soul Htite—also of the US forerunner Lending Club. But Dianrong, he told TechNode, was uniquely Chinese, not just a local version of Lending Club.
- Jun 24, 2014: “P2B is becoming the favorite online lending model of Chinese VCs after P2P heat ebbs?”
By 2014, P2P lending had already acquired a shady reputation, leading some to rebrand as “P2B”—peer to business. But the sales pitch—directing capital from ordinary investors to efficient but under-capitalized SMEs—was much the same as earlier P2P players.
- Aug 18, 2014: “[TechCrunch Beijing] Lending Club, Dianrong cofounder Soul Htite: P2P industry to be regulated in future 3-4 years”
Industry leaders remained confident. Dianrong boasted average returns over 14%, with only a 1.27% rate of defaults. One advantage, Htite said, was the responsible Chinese consumer: while Americans frittered borrowed funds away on “attending parties,” Chinese consumers invested it in education.
- Jun 29, 2015: “More challenging, greater impact: Lending Club/Dianrong founder on China”
Soul Htite was a star, explaining his secrets to success. In 2015, Dianrong struck a deal with Alibaba’s Sesame Credit to share credit information, and told TechNode “I love Chinese food and steamed buns are my favorite.”
- Aug 20, 2015: “[Update] China’s P2P lending site Dianrong lands massive $207 million Series C backed By traditional banks”
Investors were convinced—and money flowed into Dianrong throughout 2014-16 from blue chip backers including Standard Chartered Bank and Tiger Global Capital.
- May 27, 2016: “Chinese P2P lender closes, executives detained as industry struggles with fraud”
By 2016, it was clear the industry had some very bad actors. In January, major platform Ezubao turned out to be a Ponzi scheme. Twenty-three executives were arrested and accused of stealing billions. In May, police in the southern city of Huizhou shut down another platform, Esudai, and arrested 13 executives, accusing them of “absorbing” hundreds of millions of RMB. Still, many remained bullish, viewing the arrests as natural winnowing of the market.
- Mar 10, 2017: “A brief look at the current state of China’s P2P lending industry”
China is facing two extremes of P2P platforms going up and down: record-breaking funding rounds (Lufax, $10 billion) and record-breaking Ponzi schemes (Ezubao, $7.6 billion).
Despite the concerns, it is hard to forecast a sudden downfall of P2P platforms in a country where outstanding loans totaled RMB 816.2 billion at the end of December 2016 from P2P lending platforms alone. Using those platforms have already become a habitual thing for Chinese public, especially those who don’t fall into China’s traditional banking categories.
- May 12, 2017: “China’s average P2P investors are becoming the opposite of what you’d expect”
Indeed, 2017 saw confidence in the industry rise: average contributions by investors increased, while the platforms’ user base broadened, adding more female, young, or rural users.
- Aug 2, 2018: “The rise and fall of China’s online P2P lending”
[Editor: Recommended—if you read one piece on P2P lending, make it this one!]
2017 was the last hurrah for P2P. By 2018, it was a national scandal, with investors who’d lost money in platform collapses demanding justice. In the face of public anger, regulators opened a “rectification campaign” in late 2017, giving P2P platforms until June 2018 to get in shape. Instead, hundreds defaulted on their obligations, causing losses—and anger—to spread.
Some of them protested in front of police stations and chanted the Chinese national anthem March of the Volunteers, trying to pressure the authorities. Some of them organized online investor rights groups, making a collective effort to get back the money. They’ve made headlines of domestic media and sparked intense online debates on who will be responsible for the loss and where the industry is heading.
- Jan 31, 2019: “China’s P2P lending sector a ‘disaster zone’ of fraud: government official”
- Feb 21, 2019: “China’s online P2P lending industry is undergoing a massive shake out”
In 2019, defaults multiplied under regulatory pressure—by the start of 2019, almost 5,500 platforms had collapsed, wiping out over RMB 177 billion in investments. Even industry leaders—including pioneer PPDai and Ping’an’s Lufax—began pivoting to other markets. Others tried to escape to Southeast Asia. Still, our sources told us that “consolidation” would winnow the field to a few entrenched industry leaders.
- May 9, 2019: “INSIGHTS: P2P lending in crisis as regulatory bubble pops”
But by May, we could read the writing on the wall. Regulators were moving in for the kill.
One moral: TechNode called the story a “regulatory bubble.” The industry grew faster than markets would have predicted, driven by the irrational exuberance of local governments; when it started to go bad, regulators sped up the process by culling companies.
- Aug 22, 2019: “P2P lending platforms feel the pressure as regulators squeeze them out of the market”
Hebei regulators told hometown giant Fincera to stop making loans in the province. The company was forced to auction off the tallest building in the province and move to Beijing, while complaining of “continuous unfounded opposition” from once-friendly provincial authorities. A battered Dianrong managed to raise an undisclosed sum of money to meet new reserve requirements, despite closing 60 of 90 brick-and-mortar lending outlets and laying off some 2,000 employees.
- Aug 27, 2019: “Don’t blame internet finance for all of the problems in P2P lending: Jack Ma”
P2P? Who, me? Clearly, the Ant founder recognized that the association was not good for the brand.
“P2P lending was not internet finance from the start. It is just an industry of illegal financing businesses that have websites. We shouldn’t blame the problems all on internet finance. Of course, internet finance still has a lot of room for improvement.”—Jack Ma, chairman of Alibaba
- Nov 4, 2019: “P2P platform operators urged to exit as regulators mull next clampdown phase”
On Nov. 1, Shanghai told the 40 platforms left in the city—including many of China’s largest survivors—that it was time to shut down, following similar actions by Shandong and Hunan provinces. A few days later, national regulators encouraged companies across the sector to follow suit. The story of P2P lending appeared to be over.
Haunting the fintech industry
Was P2P always doomed? From the start, we could see that the industry was under-regulated: thousands of companies got into the game with little to no oversight, many scammers among them; others simply managed their finances imprudently. But if you asked Dianrong or Fincera, they said they got a bad rap: once regulators lost faith in P2P lending, they raised requirements so high that even good platforms couldn’t survive.
The industry has left a legacy, introducing many consumers to micro-borrowing for the first time, and helping to pave the way for routine borrowing to fund consumption—it helped build the market that Ant is now making billions from. But it is remembered chiefly as a cautionary tale.
For regulators, it’s a lesson about the risks of letting markets run wild. For investors, it’s a lesson that what’s booming today could be illegal tomorrow.