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Business trends

China's peer-to-peer lending hits the skids

Investors lose out as online platforms shutter ahead of crackdown

Peer-to-peer loans in China had doubled on the year as recently as 2016.   © Reuters

SHANGHAI -- Peer-to-peer lending is slowing dramatically in China as a looming clampdown on the industry spurs platform providers to throw in the towel -- sometimes after just a few months in business.

The balance of peer-to-peer loans, or financing between individuals, came to 1.29 trillion yuan ($202 billion) on April 30, up a mere 6% from the end of 2017. That increase represents a sharp slowdown from the 50% surge last year and the 100% jump in 2016, according to industry information provider WDZJ.com. Less than 200 billion yuan worth of contracts were signed for April, down around 20% year on year.

Take an online platform launched just in January. The company solicited short-term funds from retail investors and extended loans to small business owners using their BMWs and other luxury vehicles as collateral. Individuals were lured by the convenience of completing every step of transactions online, in addition to the 8% annualized return promised by the website. But in March, investors started complaining that they could not get hold of the company and they have yet to get their money back.

Authorities are clamping down on the industry, with registration to be required starting in mid-2018. This has raised the prospect of difficulty procuring operating funds from financial institutions. The company that launched in January "must have realized it won't be able to make money so vanished with the investors' money," said an official at a bank.

More than 80 players in the industry closed up shop in March and April alone. While the majority of them winded down after returning investors' money, nearly 30 are not done paying back the principal and interest.

Peer-to-peer lending remains attractive to investors willing to shoulder some risk for the possibility of an 8% to 10% return, at a time when the standard interest rate on a one-year time deposit remains at 1.5% in China. But the future of the market will hinge on putting together an adequate framework for protecting investors.

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