Rapid expansion of China's P2P lending spells trouble

Zhang Yutang has made several trips to Xiaogan City of central China's Hubei Province hoping to get back the 300,000 yuan (48,300 U.S. dollars) he invested in a peer-to-peer (P2P) lending program. The businessman from east China's Zhejiang Province has always returned empty-handed.

He entered into the deal via Xiaogan-based Tianlidai, a P2P online platform, which went bust in October.

Instead of serving as an intermediary for lenders and borrowers as it should, Tianlidai pooled investors' money to fund its own projects. When projects failed, lenders failed to get repaid.

"It's hard to tell which P2P platform is rule-abiding," Zhang said. "Their promises of guaranteed repayment are often a sham."

Tianlidai is not an isolated case. Over 70 P2P platforms collapsed last year, around 60 in the fourth quarter. The alarming rate has alerted investors of the enormous default risks accompanying promised high returns and made tougher regulation necessary.

ANGEL OR DEVIL?

P2P lending is the practice of lending money to unrelated individuals that bypass the banking industry. It was introduced to China in 2006.

With stock market performances disappointing and banks' deposit rates at very low levels, investors resort to P2P sites hoping to bolster their returns.

P2P lending boosted annual investment returns of 15 to 20 percent, which means that investors can get four to six times the returns on bank deposits.

It is not only a boon for investors, it also provides hope for cash-hungry individuals whose need for financing services are often ignored by big banks.

Rags-to-riches stories propped by P2P money have made headlines, elevating the status of this new mode of financing and people's interest in it. The industry is flourishing, without much government supervision.

By the end of 2013, the number of P2P lending companies in China had exceeded 800 with a yearly turnover of 100 billion yuan, according to Wangdaizhijia (home of online lending), a web portal that tracks the industry.

No threshold, no industry standard and no regulation -- these factors have contributed to the wild growth of the P2P industry, said Huang Zhen, a professor of law with the Central University of Finance and Economics.

The wild expansion and escalating competition have pushed up interest rates. Some P2P firms even promised annual returns of over 40 percent to woo investors, thus increasing default risks.

Many P2P online platforms are just a transmogrification of former players in the private lending market, who lack a thorough understanding of liquidity management, according to Xu Hongwei, a senior executive of Wangdaizhijia.

Systemic risks are building up due to the absence of regulators and the industry's frenetic need for growth to offset the risks, said Bai Chengyu, general secretary of China Association of Microfinance.

Xu estimated that 80 or 90 percent of China's P2P companies might sink.

REGULATION NEEDED

Recognizing the importance of P2P lending in supporting economic growth, analysts have called for more regulation so the industry can expand healthily.

Professional supervisory agencies should be in place as P2P online platforms have no boundaries and their activities are elusive by nature, said Xu, adding restrictions should be exerted on areas including registered capital, lending leverage, reserve ratio and single loan limits.

Qi Shouyan, CEO of P2P platform Yiqihao, said China's P2P industry must improve risk control.

The central bank has urged the establishment of China's Internet Finance Association, which would exercise proper oversight on the P2P sector.

The bankrupt P2P platforms constitute a small fraction of the whole industry and healthy growth can be expected with sufficient financial oversight, said Zhao Ruobing, an official with CreditEase, a leading Chinese micro-credit firm.

"I will not give up investing through P2P lending as it is more profitable than putting money in my bank account," said Zhang Yutang. "But I will shun companies that promise excessive high returns and place my bet on safer ones even though with relatively lower returns."