China’s online peer-to-peer lending sector — where savers lend out money directly to businesses and consumers over the web — is by far the biggest in the world, but it’s also one of the most unregulated.
Henry Yin, managing director of CreditEase, one of China’s biggest platforms, gave an idea of just how big and dangerous it is by outlining how huge losses have been so far.
Speaking at the LendIt Europe conference in London last week, Yin said Chinese investors, the majority of them unsophisticated individuals playing with savings, have lost an estimated $US1.2 billion (£780 million) putting money into Chinese peer-to-peer lending platforms, largely over the last 18 months.
A Morgan Stanley report quoted by Quartz claims there were around 1 million P2P investors in China by December last year, up from 200,000 in the same month a year earlier — it’s growing fast.
If ordinary investors were losing hundreds of millions in the US or the UK there would be uproar — but in China, the story has gone largely under the radar.
What’s more, most of the money lost has not been due to bad loans made on these platforms, but dodgy platforms themselves.
Yin said over 700 online lenders have gone bust in China this year alone. The majority go sour for two main reasons:
- ‘Run away platforms’: People set up dodgy platforms, take deposits, then just shut up shop and disappear.
- ‘Self-funding’: Where platform owners fabricate loan flow and instead use deposits to fund their own personal projects.
Rhydian Lewis, CEO of UK peer-to-peer lender RateSetter, visited China last year and told Business Insider earlier this year that the market was going through “a Darwinian process on steroids.”
Peer-to-peer lending in China is like the wild west right now — an unregulated free for all where scam artists are as welcome as genuine entrepreneurs.
Most of the malpractice happens on a small scale at the bottom of the market, which partly explains why it has failed to generate big headlines.
Despite the huge number of platforms going bust, there are still an estimated 2,000 online lenders in China and just 50 represent about 50% of the market. And online lending remains a tiny fraction of China’s financial services overall too.
A bigger story in China has been the losses ordinary people have had playing the stock market, which crashed spectacularly from July onwards.
But regulators are now beginning to get a handle on the online lending sector. The first official principles for how the market should operate were outlined by the government in July and concrete rules are expected imminently.