Loan Defaults Plague Chinese P2P Industry

Investors have been withdrawing funds from peer-to-peer lending platforms amid a wave of defaults across the industry in China.

According to a report in the Financial Times, the move on the part of investors is causing some of the peer-to-peer lending platforms to collapse. According to the report, around 150 online lending platforms have had problems since the start of June — compared to 217 in all of last year. Those problems, cited by research firm Online Lending House, which tracks the peer-to-peer industry, includes investors not being able to withdraw money, police launching an inquiry into a platform or owners running off with the cash. The report noted in Hangzhou, a wealthy city in China, officials have turned two sporting stadiums into welcome centers for petition bureaus to receive complaints from peer-to-peer lending customers. The city is home to Alibaba, China’s leading eCommerce player, and other FinTech companies.

The shuttering of the peer-to-peer networks is being blamed on a combination of regulatory failures, fraud and the declining debt going to weak borrowers and questionable banks. “A fair share of the recent P2P thunderstorm comes from lawless people operating under the guise of internet finance to commit fraud,” said Ben Shenglin, dean of the academy of internet finance at Zhejiang University in Hangzhou, in the Financial Times report. “Beyond that, overall economic conditions have deteriorated, and then you add the impact of the deleveraging campaign, which means some legitimate platforms can’t find a profitable niche.”

Despite all the challenges the industry faces, the report noted that China’s ruling Communist party is still supportive of the marketplace as a means to provide credit to consumers and small businesses, two groups that are underserved by traditional financial firms. “Survival of the fittest is a law that the development of every industry must respect. One cannot blindly negate the industry because of short-term problems,” Xinhua news agency quoted Yang Dong, director of the Center for Internet Finance at Renmin University in Beijing, as saying earlier this month.