BLOG4 Chinese P2P lending crisis

First of all, what is p2p? It is a kind of private micro-lending model that gathers a small piece  of funds to lend to people who need funds. It is one of the products of Internet finance. This means allowing individuals to get loans directly from other individuals and financial institutions to act as intermediaries.

Although P2P is well-intentioned, it contains many problems included Platform of bankruptcy, fraud, cash drag and so on. Among them, fraud is the most serious place of P2P lending, especially in China. These platforms use high interest rates to entice investors, who are attracted by these high interest rates with fluke mind and no expertise.

For example, a Chinese P2P platform of Qidian fund is not qualified to engage in the financial industry. Since 2013, it has continuously publicized its company's "P2P" operation model to the society through television, newspapers, the Internet and other media. The starting point fund also promises investors monthly interest payments ranging from 18% to 22.4% on annual returns, and pays principal and earnings at the end of the term. From January 2013 to June 2015, Qidian fund absorbed 349 million yuan (406 people in total) through offline financial management, and 171 million yuan (1,908 people in total) through online financial management. The actual owners of the Qidian fund deposit these funds in their own accounts and conduct high-interest lending operations. In 2015, this  approach ‘Rob Peter to pay Paul’ can not keep the company running and And the police found evidence of fraud.

This is just one example of a fraudulent platform. In 2014, there were 275 problem platforms, among which 126 were fraud platforms, accounting for 45.8%. But in 2013, there were only 76 problem platforms, five of which were frauds. In one year, the growth rate of fraud platform is as high as 2420%. This triggered a P2P lending crisis in China.

 According to the figure of Caixin (2019), In 2015, there were more than 3,600 P2P platforms in China which is a peak moment for the whole industry. But only 646 will remain by September 2019. The monthly maximum loan has dropped to 69.7 billion yuan from 250 billion yuan.

In August 2018, Some Chinese government departments included China Banking and Insurance Regulatory Commission, National Development and Reform Commission and Credit Bureau have started to clean up P2P platforms. On August 13, these departments published rules ‘the check list of net loan compliance problems’. P2P platforms in China have been put on the regulatory track and are moving in the right direction. The decline of illegal P2P platforms is a sign that China's P2P industry is on the right track. From this perspective, the current crisis may be a turning point in the P2P industry.

 References:

‘Charts of the Day: China’s Incredible Shrinking P2P Lending Industry’, Caixin ,https://www.caixinglobal.com/2019-10-23/charts-of-the-day-chinas-incredible-shrinking-p2p-lending-industry-101474648.html (Accessed 08 Nov 2019)

‘What Is Peer-To-Peer Lending?’, Peer-To-Peer Lending (P2P), https://www.investopedia.com/terms/p/peer-to-peer-lending.asp. (Accessed 08 Nov 2019)