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Investors left to rue losses as fraudulent Chinese P2P lenders collapse in tighter regulatory environment

Tightened regulation and a liquidity crunch lead to spate of P2P platform collapses affecting hundreds of thousands of small investors across China

Yujing Liu UPDATED :

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Gao Bin lost his family’s life savings when Chinese online micro lending platform Tangxiaoseng collapsed in June. The 43-year-old auditing director and his wife had invested 860,000 yuan (US$129,000) in the peer-to-peer lender, only to discover on June 18 he could not withdraw his investment. He later found out the company had been placed under investigation two days ago for “illegally absorbing public deposits”.

Tangxiaoseng, which in theory matches investors with borrowers of small loans, had said it had accumulated a transaction volume of more than 80 billion yuan (US$11.96 billion).

The industry might enter a great recession
Zhang Guodong, secretary general, Shenzhen Internet Financial Association

“I couldn’t sleep for three straight days. It’s a huge blow to my entire family,” said Gao, a resident of eastern China’s Suzhou city. He said he had planned to use the funds to pay for his cancer stricken mother’s treatment and finance a down payment for a flat.

The Shanghai police said on Saturday it had detained Tangxiaoseng’s legal representative, Tao Lei, for issuing illegal wealth-management products and offering return rates ranging from 5 to 15 per cent a year. A total of 38 billion yuan in funds were involved in the fraud.

Spate of collapses

Hundreds of thousands of small family investors across China have had their fingers burnt over the past few months, which have seen a spate of P2P platform collapses. The industry has of late come under intense pressure because of tightened regulation and a liquidity crunch.

A total of 63 P2P lenders reported issues with liquidity and suspended fund withdrawal in June, up from just 10 in May, according to Wangdaizhijia, a data provider on China’s online lending business. Another 17 quit businesses voluntarily, and together these 80 platforms owed 3 billion yuan in outstanding loans.

Although such lenders have been in decline since early 2016, when regulators started clamping down on scams and risky behaviour, the recent collapse suggests investors and platform operators were not prepared for the impact. Beijing initiated a review of P2P lenders following the introduction of tighter regulatory requirements in 2016, such as the appointment of a custodian bank and full disclosure of the use of deposits.

Eight charged in China over ‘Ponzi scheme posing as P2P lender’ that took US$9 billion

“The crackdown turned out to be much more severe than expected,” said Richard Zhu, an IT engineer at Zillion Fortune, a Shanghai-based financial services company. “Companies’ accounts were frozen by the regulators for inquiries, and employees lost jobs.”

And platforms that failed to clear their review before the end of June this year will be forced to liquidate.

Zheng Yang, director of the Shanghai Financial Service Office, told the South China Morning Post this year the deadline would probably be extended to maintain social order. “We want to give some of the platforms time and the opportunity to make amends, so that they can eventually meet the regulatory requirements,” he said. “Some of the efforts have proven to be successful.”

Credit crunch

Technically, a P2P lender is an information provider that matches borrowers with lenders. But most players raise money from depositors before lending it to corporate borrowers, such as property developers, to chase high returns.

The decline of P2P lenders also comes against the backdrop of a tightened credit environment and monetary policy in China, as the government tries to deleverage the economy.

As borrowers fail to raise money because of monetary tightening, they are unable to generate sufficient cash flows to repay P2P lenders.

“The industry might enter a great recession,” said Zhang Guodong, secretary general of the Shenzhen Internet Financial Association, an industry body formed by financial technology companies. “Everyone is very nervous now.”

The number of operating P2P platforms fell to 1,836 in June from its zenith of 3,800 in 2015, based on statistics from Wangdaizhijia. And this number may shrink further – to under 200 in three years -because most existing lenders do not meet regulatory requirements, according to a report issued by the China International Capital Corporation on Friday.

Zhang said a liquidity crunch that spread from the stock market and real economy forced some platforms with shady practices to fold, which then led to investors rushing to withdraw their money in a panic, resulting in fund shortages at more platforms.

The central business district in Beijing. As P2P platforms with shady practices fold, investors are rushing to withdraw their money in a panic, resulting in fund shortages at more platforms. Photo: Bloomberg

“The collapsed platforms were usually involved in practices such as making up information of borrowers that did not exist, and using the funds raised for their own businesses,” he said.

Scams and illicit behaviour mushroomed in the sector, as P2P lending platforms proliferated from 2011 to 2015, on the back of their popularity among individuals and small businesses that could not access credit at traditional banks.

Ezubao, once the biggest player in China, was found in 2015 to be a Ponzi scheme that scammed 100 billion yuan from more than 1 million investors.

A Shanghai-based banking regulator, who spoke on condition of anonymity, said operators involved in illegal activities will be further investigated by law-enforcement authorities, so it could take some time before depositors can get their money back.

Lu Baogen, 70, a Shanghai-based investor in P2P lending, lost 10,000 yuan. “My son constantly reminded me about withdrawing the money at the beginning of this year, but I hesitated in doing so because I didn’t want to lose the interest income,” he said. “It is too late now, because the P2P company is under investigation by regulators, with its accounts frozen.”

Regulatory uncertainties

Uncertainty over regulatory changes has also contributed to investor panic, said Michelle Li, an equity research analyst at AMTD Group, a Hong Kong-based investment bank and asset manager.

Chinese regulators recently postponed the deadline of a review of all P2P platforms by local authorities that was expected to be completed by the end of June, raising fears that the requirements may become even stiffer.

Pan Gongsheng, vice governor of the People’s Bank of China, the country’s central bank, said last Monday that it planned to take “another one to two years” to clamp down on risks involved in internet finance.

“Regulatory uncertainty increased because there might be more requirements and rules on top of the ones rolled out for the June review,” said Li. The regulators have asked P2P platforms to keep their funds with custodian banks for safeguarding, and have capped loan sizes for individuals and enterprises, among other requirements.

The People's Bank of China says it plans to take another year or two to clamp down on the risks involved in the internet finance sector. Photo: Bloomberg

Zhong Xin, a Shanghai-based partner at law firm King & Wood Mallesons, said the regulators could be introducing a centralised licence scheme, barring those unable to pass the requirements from operating.

This will be good news for P2P platforms with sound business practices, because a set of unified requirements across the country will provide clarity about regulations, instead of different policies in different provinces.

“The clean-up of the P2P sector will also be beneficial to the macroeconomy, because with small and dispersed loans, the platforms are naturally positioned to serve those that traditional banks might not be able to serve in the short term,” said Zhong.

Outlook for investors

But future remains grim for investors who have lost their money because of scams and P2P platforms folding.

Although Tangxiaoseng is under investigation, Gao said efforts by fellow investors to raise awareness about the case have been closely monitored by the local police out of fear of collective action.

“The police came to my house and warned me not to protest, just moments after I sent out messages in a group chat of victim investors,” said Gao.

China’s tighter P2P rules may trigger unexpected run on deposits

Most of the investors were poorly educated about financial investment and risk, and some were even retired people who poured their pensions into the platform, he said.

The chances of them retrieving their lost funds are slim. In cases of P2P fraud, investors usually get back just 20 per cent of original investment after years of lawsuits and investigations, said Shenzhen Internet Financial Association’s Zhang.

Additional reporting by Daniel Ren

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