China’s blood on the carpet in P2P lending

One other thing struck me as the discussions fired away in Shanghai at Lang Di … is China going to haemorrhage and bring down the world’s financial systems … or is that just what the Western media would like us to think?

The reason I raise it is that I see almost every day in The Financial Times, The Wall Street Journal, The Economist and other respectable business press, some big story about China’s shadow banking system being about to crash. They even write books about such things. But, in reality, what struck me is that yes, China has a great wall of debt, but debt is good as long as everyone else believes you’re good for the money.

This is what has propped up the USA and UK for years, and the reverse can be seen when nations ability to payoff debt is questioned. Portugal, Italy, Greece, Spain and Ireland all got caught up in a sovereign debt crisis at the start of this decade because investors raised concerns that they weren’t good for the money. Equally, many nations end up with junk bond status for their T-bills when they clearly cannot maintain a stable economy (think Venezuela).

But China has motored forward for the past two decades on double-digit and now single-digit growth forecasts. China’s growth is fuelled by debt, but you can see it from the massive projects they implement. I was in Beijing on this trip also and my guide said that in 2015 the PRC decided to reduce greenhouse gas emissions. As a result, they’re building subways to get cars off the roads. With 23 million residents and one person in five driving, that’s 5 million cars on the road every day. Good idea: build subways. I may have misheard but they’re building almost 35 by 2020 at a cost of billions. Same with subsidies to people who drive electric cars, and all public transport is moving green. As a result, Beijing already has 10% less emissions than Shanghai, which has 10% less emissions than Hong Kong. These guys move fast, build quick and use money for leverage of progress. It is visible everywhere.

But not all is green in the garden and not everyone is wearing rose-tinted glasses. I was pretty unsurprised to hear that the peer-to-peer (P2P) lending market has become a basketcase in China in the last two years, as it rose fast from unregulated roots and allowed thousands of start-ups to emerge in China, offering great rates and guaranteed returns. There were also some extreme examples of P2P lending, such as the one that asked for your naked photograph as collateral. Don’t pay back the debt, and your nakedness gets shared with all of your friends online.    Now, that may not be so bad for someone working in the sex industry but, for your average Joe and Jane, sharing my dick pics with a stranger to get a loan just seems a bit wrong.

In fact, this then moves us towards the core of what’s been wrong with China’s P2P lending market. It started in 2007 and flourished, unregulated, for almost a decade. Then the regulators started to crack down, and guess what? Many of the platforms collapse.

Take the example of Wonga in the UK and magnify it by 2,000. Wonga flourished unregulated for almost a decade, then the regulator capped interest rates and allowed borrowers to claim back money overpaid. Wonga couldn’t make the profits of the past due to the capped rates and couldn’t handle the admin of 1000s of vulture claims firms clawing to get monies repaid, so they folded.

This is what I consider China’s P2P market to be like, but magnified massively and, because P2P lending involves connecting someone who has money (the saver) with someone who doesn’t (the borrower) will see millions of average Chinese citizens lose their life savings.

TechCrunch recounts such stories well, with an illustration of a widowed, single mother losing 3.8 million RMB (USD$550,000), her life savings, and who is now desperate to survive. These investors who have lost their life savings are taking to the streets and protesting, not something encouraged in China, but it’s not surprising when the companies are buckling under at an increasing rate. In May 2018, ten companies were thought to be in trouble, as in being unable to pay back investors; in June the number increased to 63; and in July 163 or, if you prefer, more than eight companies every working day.

Now, to put that in perspective, there are over 3,000 P2P lending platforms up and running in China and some of them, such as PPDAI, are very good. However, if you can get funding and lend it without having to pay back the principal any time soon, you end up with a kind of internet-enabled Ponzi scheme on a massive scale. And when monthly transactions are running at 130 billion RMB (USD$19 billion) per month, well, it makes a sad day when it all comes raining down.

Oh, and what sparked this meltdown?

Regulation.

Having left the market fairly unfettered for the last decade, the People’s Republic of China (PRC) government introduced the P2P rectification scheme last year. The scheme demanded that the P2P lenders register with local authorities by June 2018 as information intermediaries. As an information intermediary, they are then not allowed to pool funds from investors or grant loans to any client or provide any credit services.

Well, that was well thought through wasn’t it?