China’s bid to tame its peer-to-peer (P2P) lending sector could cost smaller platforms some business, but the impact on larger players will be limited, and some of the new restrictions will be hard to enforce, analysts and industry players said.
Regulators unveiled a series of measures on Wednesday night to head off signs of rising risks in its fast-growing P2P market, including borrowing limits and forcing P2P platforms to use third-party banks as custodians of investor funds.
China’s P2P and online finance industry has boomed in recent years, but growth is slowing after a series of scandals and multi-billion dollar failures.
The regulator’s announcement knocked 22% off the New York-listed shares of Chinese P2P lender Yirendai Ltd overnight, while Chinese stocks fell to a two-week low yesterday, weighed by banking shares on concerns over the crackdown on riskier lending practices.
But many larger P2P companies including Lufax, Yirendai, PPDAI and Dianrong.com, say they already comply with many of the new requirements, so could benefit from the restrictions.
“Before the rules were released, people didn’t have judgement on which platform is good, but now they can understand it. Investors will definitely withdraw money from the platforms which are violating the rules,” said Cliff Zhang, chief executive of China’s oldest P2P lender PPDAI.
China’s government for years maintained a hands-off approach to promote alternative sources of funding for consumers and small businesses, which often struggle to get credit from banks and other mainstream financial institutions.
The volume of P2P loans surged more than 20 times to 656.8bn yuan ($98.7bn) at the end of July from just 30.9bn yuan in January 2014, according to industry data provider Wangdaizhijia. Nomura estimates that could reach 880bn yuan by the end of 2016 and 1.5tn yuan by the end of 2018.
P2P lenders have been discussing new rules with the government for several months in a bid to improve sentiment toward the sector, which took a big hit earlier this year when Ezubao, once China’s biggest P2P lending platform, folded.
Ezubao turned out to be a Ponzi scheme that solicited 50bn yuan in less than two years from more than 900,000 retail investors. The dialogue with government has given platforms the opportunity to start preparing for the changes, and they have a year’s grace to implement some of them.
“At the beginning of last year we started to transform our business model from SMEs to individuals, so now more than half of the loans we match are under this 200,000 yuan limit,” said Xie Qun, CEO of P2P platform Jimubox.
“We’re confident with this one-year grace period, we’ll be able to convert all this business to be compliant,” he added. Several lenders already segregate investors’ funds into custodial accounts with banks to prevent fraud, while for companies like Lufax, a typical unsecured loan would be in the 100,000 yuan to 200,000 yuan range, below the government cap.
Industry officials said borrowers and lenders were in any case likely to find ways around the caps. “If you look at how China’s internet market has worked historically, people always find a way,” said Simon Loong, founder and CEO of WeLab, which operates a P2P platform in Hong Kong and Chinese mobile lending platform Wolaidai.
“I don’t mean to try to beat the system, but people try to adapt their business model, find a way to survive with the customer base or information data they’ve already collected.”