Xiao Man, August 9, 2018
China’s online P2P lending platforms are currently being rocked by one crisis after another, with media and the public calling a crash, collapse, and high storm in the sector. A large number of investors who have lost their principal entirely have recently flooded into Beijing to petition for redress. To shield the financial institutions from the public rush, Beijing police set up barricades on August 6, grabbing anyone they thought suspicious and loading them into rows of passenger coaches they had lined up on the Second Ring Road.
Video and photographs show buses, full of petitioners, along the shoulder of Beijing’s Second Ring Road; police were also stationed nearby in large numbers. China’s Banking Regulatory Commission, the Bank of Beijing, Bank of China, and other major financial institutions were the focus of the police defense measures. Some reports also say that a number of important financial agencies in Beijing received instruction to establish patrols inside and outside their buildings and strictly prevent outsiders from entering. Employees of the banks were instructed not to stop and make a spectacle of the intrusion, and that they had to wear their employee badges at all times.
In June, China’s supervisory and regulatory agencies embarked on a clean-up of online financial platforms, resulting in the liquidation of over 100 P2P lending platforms, business closures, flight of executives, and the cessation of redemptions for investors. A full-blown domino effect had taken hold by the end of July; within the first week of August, 42 P2P companies went bankrupt, sparking the mass protests by investors attempting to recoup their capital.
As the Financial Times explains, after 40 years of reform and opening to the world, the Chinese have capital they wish to invest, but are dissatisfied with simply leaving it in the bank. Nor are they happy with the “wealth management products” offered by banks. But due to China’s political system, the financial system is monopolized, and the development of the internet and in particular smartphones gave investors and lenders the ability to rapidly find platforms matching them with borrowers for their capital. This allowed some degree of financial liberalization and ‘inclusive finance’ (普惠金融).
China’s peculiar national circumstances have resulted in the rapid development of internet commerce, with both good and bad companies in the mix — and to a degree, growth in the sector has been distorted. The result has been that investors face risks beyond those expected in a normal market economy — they must also bear the risks of the gaps and loopholes in regulation caused by the political system. There are both good and bad P2P lending platforms in China. Many of them, in order to gather capital, have deceived investors by trumpeting their connections to officialdom. Some of them do legitimate business, while others are simply Ponzi schemes. Further, the deterioration of economic conditions in China has led some projects that initially appeared viable to become insolvent and unable to return investor capital. Finally, the government policy of deleveraging has resulted in a lack of liquidity in the market, making it impossible for some of these platforms to source new funding to pay out creditors.
Because many P2P platforms were endorsed by local governments — or claimed they were backed by state enterprises and took out advertisements on CCTV and other state media — they won the trust of investors. By 2016, 160 million Chinese had taken part in P2P investment; by 2018 the P2P market had grown to a value of over 7 trillion yuan [Translator’s note: according to DBS Group Research, the figure was 1.2 trillion yuan ($175 billion) by 2017]. In the first half of this year, the legally responsible individuals at over 700 lending platforms absconded, leaving investors unable to get back their capital. The sums involved extend into the hundreds of billions of yuan. In particular beginning from early June, 150 P2P platforms have defaulted on payments to creditors.
On June 14, the chairman of the China Banking Regulatory Commission, Guo Shuqing (郭树清) said the following at the Lujiazui Forum: “When anyone offers you a yield above 6%, you need to ask questions; when it’s above 8%, it’s very dangerous; if it’s above 10% then you need to be ready to lose all your capital.” Yet the warning came too late. The platforms that quickly unraveled included both state-backed and private enterprises; some P2P companies stole their customers’ funds, while others had liquidity problems causing defaults. The majority of investors with losses regarded themselves as ‘financial refugees’ and hoped the government would take a stance and resolve the problem, taking responsibility for the absence of supervision. They sought to converge on the key financial institutions in Beijing, and hold demonstrations and assemblies to put pressure on the authorities to make them whole.
Apart from retail investors extending credit, P2P lending platforms were a major source of funding and liquidity for small-sized enterprises that were unable to get loans from banks. When the platforms buckled, these companies also lost their source of funding, which further accelerated the collapse of other P2P platforms.
Scholars in China have pointed out that China to this day has still failed to develop a mature system for extending credit to businesses and individuals, and despite this the government began allowing the development of P2P lending platforms — effectively a dereliction of duty as regulators. Though the Beijing police managed to strangle the first wave of protests in its crib, the essence of the problem hasn’t been resolved. From now on, P2P lending platforms will become a new problem affecting China’s social stability.
This article was published in Radio France Internationale on August 7, 2018, translated by China Change.