(Bloomberg) -- It was once a roughly $150 billion industry -- an innovative marketplace where individuals could lend to each other. But after years of fraud, defaults and few investor safeguards, China’s regulators are embarking on a plan to radically transform its peer-to-peer lenders.
Authorities in Beijing are working with local officials on guidelines that would convert qualified online lenders into small-loan companies, Zhu Shumin, vice chairman of the China Banking and Insurance Regulatory Commission, said Monday. Firms that don’t fulfill current requirements will be pushed to exit the industry, he said, without providing more details.
The changes are the latest moves to rein in, and perhaps kill off, China’s P2P sector. As policy makers cracked down on financial risk, they zeroed in on the lenders, whose customers were predominantly individual investors who could suffer ruin if things went wrong.
Zhu didn’t say how widely the CBIRC’s plans, which it’s working on alongside the central bank, would affect the industry. Converting P2P platforms into small-loan providers would force them to comply with rules on capital requirements and leverage that other lenders have to follow, said George Xu, an analyst at Moody’s Investors Service.
“It is in line with government policies to rein in the P2P industry and improve transparency,” he said.
Decline had already set in for the once-thriving industry. More than 1,200 online lenders have exited the market this year, leaving just 462 platforms, Zhu said Monday. As of September, the value of outstanding online loans was down 48% from the beginning of the year, he said.
Alarmed by surging defaults, fraud and investor anger, authorities have been working for years on plans to wind down small- and medium-sized P2P lending platforms nationwide. The lenders attracted heightened scrutiny as part of President Xi Jinping’s crackdown on unsavory behavior throughout the finance industry, including the darkest corners of shadow banking.
Online lending became popular in China after a tightening of bank credit in 2010 followed two years of stimulus spending to counter the global financial crisis. Scant oversight of P2P platforms allowed for massive growth, with outstanding loans ballooning from almost nothing in 2012 to 1.1 trillion yuan ($155 billion) by May 2018.
Troubles Surface
Problems began to emerge amid a slowing economy and tightened liquidity. One early sign of trouble was the unraveling in early 2016 of a P2P platform described by authorities as a $7.6 billion Ponzi scheme -- China’s largest ever -- that defrauded 900,000 people.
Read more: China is said to ready rules for P2P sector
The purge of the P2P industry began in places such as the financial-technology hub of Hangzhou, where regulators cracked down last year. The Hunan provincial government said in a statement last week that it had ended the operations of its 24 P2P platforms.
Across China, the outstanding value of P2P lending had shrunk to 610 billion yuan by September, according to WDZJ Research Center.
Even though the direction of China’s approach is clear, there’s a chance that some companies may be allowed to continue as they are, said Zhang Yexia, Shanghai-based director of WDZJ.
“China’s regulatory stance is still uncertain as the authorities will still be allowing qualified P2P lenders to stay in some areas,” Zhang said. “But the number would be rather limited.”
Online platforms that don’t successfully remain lenders may become service providers to financial institutions, said Xiao Sa, a member of the China Banking Law Society, an academic organization that studies the country’s finance rules. Some of the companies have data-management systems, as well as client bases and brand recognition built up over years, that may be valuable to other firms, she said.
©2019 Bloomberg L.P.
RECOMMENDED FOR YOU
POPULAR