Is China’s P2P Crisis the Result of Regulatory Negligence?


A new report from the Peterson Institute for International Economics (PIIE) says negligence and inaction on the part of China’s financial regulators serve as the chief culprit for the current crisis in the country’s peer-to-peer lending sector.

China’s P2P lending sector is in a state of crisis, with the failure of two thirds of all P2P lenders compared to their 3,500 strong peak in November 2015, and an acceleration in closures since the start of the second half.

15% of active P2P platforms have succumbed to serious problems since the start of June, while active investor numbers dropped by approximately 20% in July. Outstanding loans in July fell to under 1 trillion yuan, as compared to over 1.3 trillion yuan the previous month.

The failure of prominent P2P lenders have triggered a rare outbreak of public protests in both Beijing and Shanghai, prompting the central government to launch emergency measures to deal with the issue, including a ban on the launch of new platforms.

The crisis in the sector comes as a major blow for China’s initial efforts to capitalise upon the potential of fintech, after the P2P sector first began to take off in 2013.

A new report from PIIE by Martin Chorzempa claims that widespread regulatory failings are the chief reasons behind the current P2P crisis.

“The spike in failing platforms is evidence that regulators have to a large extent failed to ensure that P2P lending platforms are ‘information intermediaries’ and not financial intermediaries that carry and spread financial risk,” writes Chorzempa.

According to Chorzempa a senior government official previously described P2P lending as a “game of hot potato no regulator wants to be responsible for,” while the erstwhile China Banking Regulatory Commission (CBRC) only had several full-time staff for the drafting of regulation on thousands of active platforms.

Chorzempa highlights two key issues, the first being that China’s regional authorities are only capable of overseeing lending activities within their own jurisdictions, while P2P platforms are capable of amassing or channelling funds anywhere within the country.

A second issue is that local governments have been wont to enter “symbiotic relationships” with P2P platforms in order to obtain direct loans for public projects, contributing to the problem of local government debt that has become of immense concern for Beijing.

“A P2P lender backed by a local government openly told me that their loans went to government projects that banks would not fund,” writes Chorzempa. “The supposedly independent company that guaranteed the loans also happened to occupy the same offices as the P2P platform, which were also owned by the government.”

Despite the ongoing wave of P2P failures, Chorzempa does not consider even a full-blown crisis in the sector to pose anything more than “minimal” risk for the Chinese economy, given that outstanding P2P loans are less than 1% of P2P loans.

Financial authorities should nonetheless make haste to step up regulatory implementation and scrutiny that will avoid long-term problems at the comparatively modest cost of short-term pain, as well as solve more besetting problems in the Chinese economy that the P2P problems have highlighted.

“The greater systemic problem is how to provide Chinese savers with more options for productive investment channels,” writes Chorzempa, who also points to the need to improve access to finance for small and medium-sized enterprises.

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