China’s P2P Crisis Escalates As Firms Struggle To Stay Afload

Microlending boom goes bust.

The Chinese authorities are struggling to contain mounting anger among investors as dozens of companies in the country’s peer-to-peer (P2P) microlending sector go bust.

In August, police cordoned off Beijing’s financial district to prevent protests by groups of investors who lost money in the recent wave of defaults by P2P platforms. A rush by investors to withdraw funds precipitated the collapse of dozens of lenders.

At the time of writing, 15%, or approximately 286 operating P2P platforms, had run into serious trouble, says Martin Chorzempa, research fellow at the Washington, DC–based Peterson Institute for International Economics, citing P2P data provider “Active investor numbers fell around 20% in July,” he says, “and outstanding loans plummeted for the first time since the boom began, from over 1.3 trillion yuan ($189 billion) at the end of June to under RMB1 trillion in July. Failures appear to be accelerating as investor panic spreads.”

The shakeout is potentially enormous. After hitting a peak of 3,500 P2P lending firms in November 2015, Singapore’s DBS Group Research stated in a June report that it expects only 300 to 500, out of a current 1,800 firms, to survive as stricter regulations bite.

China is the world’s largest online P2P lending market. DBS says microlending grew rapidly in the country to become a RMB1 trillion market ($145 billion), recording a compound annual growth rate of 131% from 2015 to 2017.

P2P lenders solicit money from retail investors and lend the money to small businesses and individual borrowers. In China, lenders increasingly promised investors unrealistic rates of return on their investment, resulting in widespread cases of fraud. The naivety of some retail investors and anxiety over losses of personal savings has fueled the rout, as protesters seek compensation from the government.

Still, the concern that the P2P debacle could spill over into other sectors is unlikely, says Chorzempa. “The threat to capital markets is minimal,” he says. “P2P loans outstanding amount to well under 1% of bank loans. The money pulled out of P2P will go into investments like banks, which are perceived as less risky.”