China’s gloomy P2P lending awaits impetus from new guidelines


Recent nude photo scandals involving well-established peer-to-peer lender Jiedaibao have once again cast China’s Internet finance industry in an unfavorable light, following last year’s Ezubao fraud that reportedly bilked investors out of more than USD7.6 billion. Although recent scandals ranging from problematic operations to founders taking flight with money have shaken confidence in the sector, insiders believe that clear industry guidelines expected to come this year will revive the embattled sector in China.  

Problematic operations   

Crowdfunding-based online lending platform Jiedaibao was launched by A-share listed private equity fund JD Capital last August. It is widely reported that in less than one year, the platform has gained 110 million users and raised two rounds of USD300 million+ from commercial banks and institutional investors. However, the company’s high-profile business mode came under attack last month, with several state media disclosing that loan sharks are using the platform to extort money and nude selfies from female college students.

Jiedaibao has brewed up a “novel” plan to attract users and compete with its competitors. The company claims to have constructed a specific platform for friends and acquaintances to lend to or borrow from each other. “It is a brand new way to invest and gain loans. With all deals made between people who’re familiar with each other, you get to cash in on your social connections, and it’s also more assuring to lend money to friends,” according to Jiedaibao’s official website.

Based on the precondition of social financing, Jiedaibao would not check users’ credit background nor guarantee for repayments, while as a purely financial information intermediary, it would help collect overdue loans considering people would feel uncomfortable to ask their friends to pay back.    

Bai Yang, Beijing general manager of another top Chinese P2P platform, told that it is still early to say if the model will succeed, because the potential of so-called financing from your circle of friends is a little bit hyped up.

The idea was reportedly first tried out by the Lending Club, now one of the most successful P2P lenders in the world, which was started in 2006. The startup back then had planned to work with Facebook to construct a social network for financing purposes, but only to find out that people tend to keep the matter private instead of announcing to their friends that they need money.

According to a report by Beijing Business Today, a state-run newspaper, some Jiedaibao users revealed that in most cases people are not borrowing money on the platform from their friends. Instead, those who are in need would post messages through social media like Wechat or QQ groups and find strangers that would like to lend out. Then, the two would log onto Jiedaibao to add each other as friends. “Such practices have created opportunities for loan sharks because Jiedaibao would not verify authenticity of “friends”. And although the platform caps its annual interest rate at 24%, people are actually paying more offline,” wrote the report.

Zhu Bin, head of SD & Partners, a law firm based in south China’s Guangdong province with rich experience in online lending cases, told that the unruly sector in China is infested with all kinds of malpractices. As far as Jiedaibao is concerned, even though agreements signed with the “fake friends” would help shield the lending platform from lawsuits, its responsibility to facilitate repayments and collect overdue loans has led to many illegal actions including threatening phone calls to defaulters or harassment to their families.

The Culprit

Except for badly run operations, China’s Internet finance economy is riddled with full-on frauds, like the astounding Ponzi scheme plotted by seemingly upscale platform Ezubao.

In fact, before a series of news reports about online lending founders fleeing with investors’ money appeared at the end of last year, the P2P lending in China had gained momentum over the last couple of years, with around 4,000 registered businesses joining the sector. Total outstanding debt in the sector amounts to 576 billion yuan by the end of May, according to Online Lending House, a Chinese website tracking the sector.

Zhu told that Chinese online lending companies, unlike their Western counterparts who serve purely as information brokers, are usually not capable of matching loan projects due to limitation of technologies. “The platforms are secretly practicing maturity mismatch, meaning money from the investors would not directly go to the borrowers but stay with a third party for a period. This leads to many problems” he concluded.

Worried about the negative impact of financial scandals on the banking sector, China’s central bank and multiple agencies earlier this year launched a year-long, wide-ranging crackdown on Internet finance fraud spanning everything from peer-to-peer lending to equity crowdfunding and online insurance in an effort to clean up the sector.

Clear guidelines needed  

Bai told that Jiedaibao is not the only beleaguered firm in the industry; instead, the whole sector is distressed this year because institutional investors are staying away from the sector.  
“The news of swindling is one reason behind this bleak situation. The other reason is that investors are sitting back and waiting for more explicit regulations to come out, so that they could determine which players are the reliable ones to work with,” he said.

Bai said clear guidelines for the industry were originally planned to be rolled out in the third quarter, although he is not quite sure if the much-anticipated official document will be released on time.
Some industry insiders who didn’t want to be named believe that the year-long clean-up campaign has affected the drafting of detailed guidelines for the P2P lending sector. According to business magazine Caijing, work on the guidelines has been temporarily suspended and will be resumed after the crackdown initiatives are finished.

 “The P2P lending is a new area for the government, and regulators don’t want players to die out under strict regulations. They hope for the industry to make itself work, so they are looking for good examples in the sector to follow. Sadly, there are only widespread malpractices and no individual player is “clean” enough to be able to comply with a regulatory framework,” Zhu said about the reason for the delay in drafting the guidelines. 

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