China’s peer-to-peer lending boom is beginning to turn to bust. Dozens of the P2P lending websites that sprang up in recent years have shut as borrowers default on loans

Last updated: January 12, 2014 3:48 pm

Reversal of fortune in China’s peer-to-peer lending boom

By Simon Rabinovitch in Shanghai

China’s peer-to-peer lending boom is beginning to turn to bust. Dozens of the P2P lending websites that sprang up in recent years have shut as borrowers default on loans. The biggest companies are unscathed so far, but the rapid collapse of smaller rivals highlights the mounting difficulties in the Chinese micro-lending industry as economic growth slows and monetary conditions tighten.It is a dramatic reversal of fortune for China’s peer-to-peer websites, which, for a small service fee, connect people wanting to invest money with those looking to borrow small amounts.

The shift is also an early warning that rising interest rates could pose problems for the sector in the US and Europe, where P2P lending has expanded rapidly in recent years as banks scaled back their lending. In China, P2P companies lend to some of the country’s riskiest borrowers, so they were among the first to face defaults as monetary conditions tightened.

Although the sector accounts for a tiny fraction of China’s total loan book, the country’s P2P lending market grew from $30m in 2009 to $940m in 2012 and is on track to reach $7.8bn by 2015, according to research published last year by Celent consultancy.

Of the nearly 1,000 P2P companies operating in China, 58 went bankrupt in the final quarter of last year, according to Online Lending House, a web portal that tracks the industry. Several more had already run into trouble this year, it added.

The signs of distress began to emerge in the second half of last year, when China’s central bank withheld liquidity from the money market and fuelled a significant jump in lending rates.

“The main reasons are the intense competition in the P2P industry, the liquidity squeeze at the end of the year and a loss of faith by investors,” said Xu Hongwei, chief executive of Online Lending House.

He estimated that 80 or 90 per cent of the country’s P2P companies might go bust.

People in the industry had hoped that P2P lenders would fill a hole in China’s financial system by helping small businesses obtain funding and by giving investors higher returns than they can obtain from banks.

While proponents believe that will still eventually prove to be the case, many believe the industry has expanded too quickly and with insufficient oversight.

“A lot of P2Ps have blindly copied each other and they don’t have a business plan that is robust enough to react to market changes. They’ve just focused on sales, scale and bragging to each other,” said Roger Ying, founder of Pandai, one of the websites that is still active.

Emerging markets are taking a battering as investors withdraw at the prospect of higher global interest rates

Wangying Tianxia, a Shenzhen-based lender, was one of the biggest P2Ps to fail, according to the Shanghai Securities News, an official newspaper. Between its founding in March last year to its failure in October, Rmb780m ($129m) of loans were disbursed via its platform.

A second China-wide cash crunch at the end of December heaped more pressure on P2P lenders. Fuhao Venture and Guangrong Loans posted notices on their websites in the first week of the new year warning investors that loan repayment might be delayed.

Amid concerns about the uncontrolled growth of the industry, the Chinese central bank last year said it would more closely supervise P2P websites and it reminded companies that illegal lending practices, such as investing their clients’ money in financial products, were punishable by death.

Some believe the turmoil will be good for the industry, eliminating the weaker P2P companies and leaving a smaller, better-managed group.

In a sign of that optimism, TrustBridge Partners, a Chinese venture capital firm,invested $65m last week in Renrendai

, one of the country’s biggest P2P lending companies, as part of a $130m funding round.

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

One Response to China’s peer-to-peer lending boom is beginning to turn to bust. Dozens of the P2P lending websites that sprang up in recent years have shut as borrowers default on loans

  1. Pingback: Finance: The Rise of P2P Lending in China | Bamboo Soapbox

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