China’s P2P Platforms Drop from over 7,000 to under 600, Few Seen Transitioning to Micro-loan, Consumer Finance Operations

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Analysts expect few of China’s P2P platforms to make a successful transition to other business models following a regulatory crackdown which has brought their numbers to under 600 from a peak of over 7,000.

The latest data from Wangdai Zhjia (网贷之家) indicates that as of the end of October 2019 the number of regularly operating P2P platforms in China had dropped to 572, with as many as 29 suspending operations or succumbing to “problems” in the month of October alone.

Data from Diyi Wangdai (第一网贷) further indicates that at its peak the Chinese P2P lending sector was host to 7705 platforms, meaning that the reading for October represents a drop of over 90%.

The decline in China’s P2P lending platforms arrives amidst an ongoing regulatory crackdown due to concerns over widespread fraud in the sector.

Chinese authorities continue to drive the withdrawal of online finance platforms from P2P lending operations, while mooting the possibility of their conversion into either micro-loan or consumer finance companies.

China’s Internet Finance Rectification Leadership Team (互金整治领导小组) and Online Lending Rectification Leadership Team (网贷整治领导小组) recently convened a meeting on “accelerating categorised disposal work in relation to online lending organisations.”

The meeting confirmed that “disposal” and “withdrawal” would be the main themes when dealing with online lending entities, while also stressing that those platforms which satisfy conditions will have the option of converting into micro-loan companies or consumer finance companies.

Domestic analysts point out that even if regulators facilitate this conversion, the transition between business models will prove challenging.

Yin Chentao (尹振涛), vice-chair of the Law and Finance Research Office (法与金融研究室) of the Chinese Academy of Social Sciences, said to Zhongxin Jingwei (中新经纬 ) said that there are fundamental differences in the way these business models operate.

“The core problem is sources of funds,” said Yin. “Online lending companies make use of money from everyday investors, but source of funds for micro-loan companies can only be their own funds or intra-sector borrowing, and cannot be funds accepted from ordinary people.

“The biggest barrier will be whether the majority of platforms can convert to their own funding sources or borrow money from commercial entities.”

Yin further points out that the leverage ratio requirements for micro-loan companies are comparatively strict, capped at four to five, yet most online lending entities have long been in excess of this.

“Because online loan organisations are information intermediaries they are not subject to leverage ratio regulation, and this also increases the difficulty of business model conversion. Not everyone will be able to adapt.”

A report from the Rong360 Big Data Research Academy (融360大数据研究院) indicates that China’s current online micro-loan licenses put a cap on leverage ratios of between one to three.

While regulators have mooted conversion into consumer finance vehicles as another option for P2P lending platforms, Yin Chentao points out that strict licensing requirements will make this a difficult process.

“Consumer finance companies are already subject to extremely clear regulatory provisions, and the entry requirements with regard to areas such as shareholders and capital are extremely high,” he said.

“Only some listed companies or comparatively large online lending companies possess this capability, and the majority of online lending companies are fundamentally unable to meet the requirements for establishing consumer finance companies.”

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