It wasn’t too long ago that peer-to-peer (P2P) financing has emerged as a new source of financing and it became the new lover of Chinese savers and investors.
However, good times don’t last long. China’s P2P financing market experienced a dramatic fall in these 2 years when the sector rocked by a series of scams and fraud.
And things went from bad to worse after the local financial regulators tightened rules for the P2P platforms, leading many of them to collapse without returning investor money.
Does the local market turmoil signal the whole P2P financing is dying?



P2P financing is a new way of debt financing that enables individuals to borrow and lend money without the use of an official financial institution as an intermediary.


Why can it become so popular in the last few years?


The banks started to impose stricter restrictions against consumer financing after the 2008 financial crisis, and it became more challenging even for those with good credit history to acquire loans.


Therefore, it opened the door for P2P financing platforms to offer easy and cheap loans to borrowers and the new way of financing has rapidly become a significant source of funds for small firms and consumers in China.


Furthermore, P2P lending is very compelling is because of the lenders or investors can get a higher return, especially in an extremely low-interest environment in a few years back.


So, it’s not surprising why a lot of middle-income savers and investors flows into the industry as they can get higher returns than conventional sources of yield.


How high is the return? It’s hovering between 8% to 12% per annum. People are instantly drawn to that. No one doesn’t like higher returns.


China Is Undergoing A Major Shake-Out


Unfortunately, trouble started brewing in China back in 2016 as a significant number of platforms were engaging in risky financing practices and the local regulator didn’t control it well.


The statistics from the Chinese Banking Regulatory Commission showed that about 40% of P2P financing platforms were in fact Ponzi schemes.


Ponzi scheme is a form of fraud that lures investors and pays profits to earlier investors with funds from more recent investors.


Ezubao, once China’s biggest P2P financing platform, folded in 2016 after it turned out to be an online scam that concocted fake projects to attract investment and pocketed funds instead of passing them to borrowers to generate returns.


This is one of the biggest Ponzi schemes in China, which saw 1.15 million investors cheated out of 38 billion yuan (S$7 billion).


A booth of Ezubao, once China’s biggest P2P lending platform, is seen during an exhibition in Beijing, China, September 12, 2015. Picture was taken September 12, 2015. REUTERS/Stringer 

Thus, the financial regulators tightened rules for the P2P platforms as a larger effort to curb financial risk to China’s economy.  Then the industry soon hit that point where doubt and genuine concern outweigh whatever goodwill its novelty once attracted.


Chinese Investors Panic Over P2P Platforms


China’s savers are rushing to pull money from P2P financing 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.


Jinyinmao, a Shanghai-based P2P lender, was one of the latest platforms to close down last year as investors lack confidence and funds are flowing out “significantly”.


According to consultancy, about 1,200 P2P firms remained operational by the end of 2018, compared with the peak of more than 6,000 a few years ago.


Source: Bloomberg


Is this the end of the road for P2P financing?


Probably not. This P2P financing crisis in China may not necessarily be a bad thing in the long run. With the fallout of China’s P2P financing industry, investors and regulators from all over the world will put more scrutiny on P2P financing firms.


P2P financing is still very new, as well as investors and regulators are not fully learning and understand the risks of P2P financing. While P2P financing is an innovative idea that attempts to improve the efficiency of loan processes, it needs to be regulated and the risks need to be understood by investors and regulators.


Besides, P2P financing in some countries are well regulated. Just take Malaysia as an example.


The P2P financing industry has grown steadily in Malaysia since the Securities Commission Malaysia (SC) issued licences to six platform operators, allowing them to raise funds from the public to provide loans to small and medium enterprises (SMEs), in November 2016.


When you compared Malaysia to the enormous number of P2P platforms in China, the former has much lesser platforms as SC take efforts to regulate the industry and Malaysia became the first country in Southeast Asia to regulate P2P financing. It’s always much easier to control in a small number of platforms.


In China, individuals can become borrowers, as you could easily find a young couple looking for others to invest in their wedding. That means the investors or lenders loan them money now for their banquet and honeymoon down payments, and they’ll pay you back with interest after they collect their wedding gifts of cash.


The question is, how do you know whether they have the ability to pay back the money? And what is the impact if they don’t have money to spend on honeymoon or non-essential spending?


But, the purpose of setting up P2P financing in Malaysia is different. These platforms are to fulfil the needs of underserved SMEs by addressing their working capital and cash flow issues due to lack of collateral or three years track record requirement that is typically requested by financial institutions.


Default Rates in Malaysia Are Remain Low


Well, not just that. The local platforms are prudent in keeping their default rate.


Funding Societies Malaysia, the largest platform operator in the country, saw it first default in August. However, the default rate is still below 1%, much lower than the long-term anticipated rate of 3% to 5%.


Source: Funding Societies Malaysia website.



Another P2P platform – Fundaztic has higher default rates at 3.06%, but it still lower than its targeted rate of 5% to 8%.


However, it’s much lower and well managed than China’s default rates in P2P financing industry. It can vary from zero on the best platforms to 35% on the worst, according to the National Internet Finance Association of China.


There is a Chinese proverb that says, “You can’t paint everyone with the same brush.”


The P2P financing crisis in China may not necessarily be a bad thing in the long run, and it doesn’t mean that it’s the end of the road for the industry in the global market.


And with the clampdown on the P2P industry in China, the international investors could possibly flow into other countries which have a strong regulatory and legal framework, and ultimately help the local small businesses.



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