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UPDATED: March 30, 2015 NO. 14, APRIL 2, 2015
Lending a Hand to Lenders
Detailed rules are in the pipeline to tackle surging risks in the unregulated P2P lending sector
By Zhou Xiaoyan


Wan Di, 33, is a senior project manager at a Sino-foreign joint venture living in Beijing. With a deep pocket and a jam-packed schedule, the biggest problem for Wan is investing his money without having to invest his time.

The solution became apparent to Wan in 2013, when he learnt of CreditEase, a leading peer-to-peer (P2P) lending platform in China. Since then, about 60 percent of Wan's investments have been made through CreditEase, with a yearly interest rate of 10-12 percent.

"That's a pretty high yield in terms of fixed-income investment," Wan told Beijing Review.

P2P lending is the practice of lending money to unrelated individuals and small businesses without using a traditional financial intermediary, such as a bank. With more and more individual investors like Wan choosing this method, P2P lending has grown exponentially in China over the past few years.

China is a country full of cash-strapped small businesses whose funding needs are often neglected by banking behemoths. The country, with a tradition of saving, is also full of savvy individual investors who are in dire need of increasing the value of their spare cash. The P2P lending industry seizes this business opportunity by matching creditworthy borrowers and canny investors.

As tempting as it sounds, the burgeoning industry is currently without government supervision--with no market entrance threshold and no business operation standards. Since last year, frequent occurrences of P2P website bankruptcy or disappearances have alerted investors to the looming fraud and default risks accompanying the high returns these companies promise, highlighting the need for proper government regulation.

Looming risks

P2P lending was introduced to China in 2006. Due to a poorly performing stock market since 2008 and low bank deposit rates, investors were quick to turn to P2P sites in the quest for higher returns.

P2P lending websites offer investors better returns than commercial lenders, averaging 15 percent in February versus the People's Bank of China's benchmark deposit rate of 2.5 percent, according to Wangdaizhijia.com (literally, "home of online lending"), a Web portal that tracks the industry.

By February 2015, the number of P2P online lending platforms in China had exceeded 1,600, with outstanding loan of 124.6 billion yuan ($20 billion). The number of monthly active lenders reached 800,000 while active borrowers reached 160,000, according to Wangdaizhijia.com.

The fast growing sector, however, is a breeding ground for risks, due to the absence of government regulation.

According to Wangdaizhijia.com, 59 P2P online lending platforms ran into operation difficulties in February, with 13 of them suspending their operations, 21 of them struggling to repay investors and 24 of them disappearing. Even the biggest players are no exception.

On March 12, Lufax.com, the Internet finance arm of China's Ping An Insurance and a leading P2P lending platform, was put on the blacklist maintained by Dagong Global Credit Rating Group, a domestic rating agency.

"Dagong decided to move Lufax from the warning list to the blacklist because of a major change in its paid-in registered capital, inadequate information disclosure and related-party guarantee," read a statement from Dagong.

Although Lufax issued a statement contesting Dagong's negative rating on March 16, the public spat between Lufax and Dagong alerted investors to the mounting problems facing the industry.

Of China's more than 1,600 lending platforms, 275 went bankrupt or had difficulty repaying money in 2014, up from 76 a year earlier, according to Wangdaizhijia.com.

"The number of bankruptcies may reach 500 this year," warned Zhu Mingchun, Chief Marketing Officer of Wangdaizhijia.com.

Reining it in

As more risks lurk in the P2P lending sector, there has been mounting outcry from the general public for tight supervision from the government.

During the Third Session of the 12th National People's Congress, the country's top legislature, from March 5-15, central bank governor Zhou Xiaochuan said a new regulation targeted at Internet finance was in the making and would soon be released.

"Regulation is good news for the whole industry as it can sort the wheat from the chaff. It's definitely good news for P2P online lending platforms that have already implemented strict risk control and standardized their operations. They will enjoy stronger growth after the release of government regulation," said Zhou Chunsheng, an economics professor with Cheung Kong Graduate School of Business. "A business reshuffle is on the way."

Zhang Jun, CEO of Ppdai.com, another P2P lending platform, hailed government supervision.

"Supervision is a good thing for the industry. There are three important elements when it comes to reduce risks: third-party custodians for clients' money, transparent information disclosures and protection for investors," Zhang said.

In January, China Banking Regulatory Commission restructured its affiliated departments and a special department, called the Financial Inclusion Affairs Department, was established to target the country's fledging P2P lending industry.

According to media reports, the Financial Inclusion Affairs Department held an indoor meeting with industry insiders on March 11 to discuss a draft regulation for the P2P online lending sector, but final rules have yet to be set.

Reportedly, the draft regulation includes a market entrance threshold--a minimum of 30 million yuan ($4.8 million) in registered capital for operators--and strict conditions on the leverage management among others. The leverage ratio, which means the amount of outstanding loans against the registered capital, should be lower than 10 times in P2P lending platforms, according to the draft regulation.

Guo Hangyu, co-founder of Dianrong.com, a P2P lending website, said 30 million yuan ($4.8 million) in registered capital seems like an appropriate amount.

"If the market entrance threshold is too low, there will be risks. If it's too high, it will hamper financial innovations," Guo said.

Guo, however, questioned the 10 times leverage limit, saying excessively stringent boundaries will limit the sector's development.

"Using the leverage ratio to regulate financial institutions is a traditional regulation mindset, such as for banks. Internet finance is different from traditional financial institutions. Using the leverage ratio to manage it may not be able to hedge the risks inherent to P2P websites," said Guo.

"For instance, if a P2P website has a large amount registered capital, it's allowed to have a large amount of outstanding loans. But the website may still fail due to poor risk control," Guo exemplified. "Therefore, their capacity for risk control will be the lifeline for P2P lending platforms and government regulation should focus on that."

Zhou Shiping, Board Chairman of Hongling Capital, a P2P lending platform, agreed with Guo, saying the 10 times leverage limit contradicts the regulator's theory that P2P platforms are information intermediaries.

"If they are only information intermediaries, why would they be subject to leverage limit? The regulation mindset for P2P industry should be totally different from that for banks. Whether a platform is reliable or not has little to do with its leverage ratio," Zhou said.

"Some P2P lending platforms are loan sharks in disguise. To avoid risks, investors should choose the established players in the market," Wan, the senior project manager, commented. "I think government supervision is bound to bring big changes to the sector."

Just like Wan, hundreds of thousands of investors are counting down the days till the regulation is implemented--but for now, they are on their own.

Copyedited by Kieran Pringle

Comments to zhouxiaoyan@bjreview.com

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