SHANGHAI -- China's peer-to-peer lenders face a Darwinian struggle for survival in 2019 with the number of operators expected to plunge dramatically for a second consecutive year amid the government's continuing crackdown on these private online financial services providers.
Beijing's efforts to rein in excess debt and tighter compliance have led to the closure or collapse of hundreds of P2P lenders. In 2018 the number of lenders dropped by 52% to just over 1,000, with a 20% fall in their combined lending balance.
This year Chinese research specialist Wangdaizhijia predicts the number will fall further to between 300 and 500 by the end of 2019. The pressures on the industry are expected to spur an acceleration of acquisitions by big lenders.
Online lender Modai collapsed late last year; the door to its deserted office is plastered with a notice that it is under investigation by financial regulators. Individual investors, who put 1 billion yuan ($149 million) of their cash into the company whose name means "magic pocket," wonder whether they will ever see their money again.
Peer-to-peer lending platforms, which match people with money to spare with those who need it, took off in China around 2015. Industry leader Weidai attracts lenders to its website with hooks such as "BMW used as collateral. One-month rate at an annualized 5%."
These platforms upload information on investment items after verifying vehicle registrations and the identifications of borrowers. Borrowers are often self-employed or owners of small and midsize businesses who have trouble getting credit from banks. Occasionally peer-to-peer lenders bundle loan applications together and solicit capital from investors for the package.
Unsecured loans are offered at annual rates of 8% to 10%, and the platforms are a tempting investment vehicle for people looking for somewhere to put their money since the stock market bubble collapsed in the summer of 2015. Wealth management products sold over the counter at banks are considered safer, but typically yield just 4% to 5% per year.
The market for online loans has grown rapidly. In 2015, there were nearly 3,500 peer-to-peer lenders. By the end of 2017, they had more than 1 trillion yuan in loans outstanding.
The wind began to shift last year after President Xi Jinping's government decided to rein in excess credit, even if it meant slower economic growth. Xi was concerned about ailing companies hanging on by turning to online lenders, in addition to widespread fraud in the sector.
The government directed banks to strictly examine loans to peer-to-peer lenders, 80% of which reportedly did not separate their operating capital from funds under management. Because the size of brokered deals totals only about 1 billion yuan at many lenders, an industry shakeout is inevitable if banks tighten their screening of loans to them.
While some peer-to-peer lenders are mere Ponzi schemes, a considerable number collapsed in 2018 due to a liquidity crunch. Until the middle of last year, Modai was expected to first reimburse investors before liquidating itself.
The number of peer-to-peer lenders in China has declined by two-thirds from its peak, while the lending balance has fallen below 800 billion yuan. Around 10 major peer-to-peer lenders are listed inside or outside China, and consolidation led by companies such as Weidai, Yirendai and PPDAI Group is likely to accelerate.
Regulators have pushed for the shakeout to discipline the industry after several lenders absconded with tens of billions of yuan of investors' money in 2016 and 2017. But analysts say the hasty pace of consolidation has hurt the economy.
Cautious investors are moving away from the stock market. The closely watched Shanghai Composite Index fell to its lowest point in more than four years in early January and has yet to mount a strong rally despite the government's aggressive economic stimulus measures.
At a time when China is facing a slowing economy and a trade war with U.S., the side effects of the government's clampdown on peer-to-peer lending may linger.