Boom-to-bust cycles come and go quickly in China. Chinese peer-to-peer (P2P) lending growth slowed significantly in 2016, as a leading P2P lender was caught in a massive fraud and the industry faced a slew of compliance regulations to weed out unqualified firms.
P2P lending exceeded 2.8 trillion yuan ($400 billion) in 2016, a jump from 2015 but at a far slower pace than the increase from 2014 to 2015. P2P lending activity stalled during the second half of the year after authorities issued strict new rules expected to cripple the majority of industry players in the next year.
P2P allows individuals to lend to other individuals while earning high interest rates. As a platform, P2P has been at the forefront of China’s financial technology industry. Thousands of P2P firms sprouted in the last few years, which connect investors (lenders) with borrowers.
These firms help fill a gap in the market. Banks—already buckling under piles of bad loans—are reluctant to offer credit to consumers or small businesses, many of whom are internet-based and cannot provide collateral. Middle-class investors, meanwhile, are flush with cash but have few places to put it for a return. P2P firms offer platforms to connect yield-hungry investors with cash-strapped individuals or small businesses.
New Barriers to Entry
Following a slew of P2P industry scandals in 2015 and 2016, the China Banking Regulatory Commission (CBRC) and three other regulators issued rules last August for P2P lenders. Compliance is mandatory by August 2017.
The rules aren’t directed at P2P arms of giant internet firms such as Tencent and Alibaba—which have in-house credit rating arms to weed out suspect borrowers. Authorities seek to regulate the massive underbelly of the industry, consisting of thousands of small and poorly run P2P lenders often targeting unqualified borrowers and promise high returns to investors. In the past, the industry’s very low barrier to entry meant that “almost anyone can open one of these platforms,” Barry Freeman, cofounder of Chinese P2P lender Jimubox, told Business Insider last year.
