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Finance

China moving to crack down on peer-to-peer lending

Misconduct abounds as individuals seek easy cash or high yields

SHANGHAI -- Beijing is tightening regulations on China's rapidly growing peer-to-peer lending market in an effort to curb foul play by loan brokers and head off a potential property bubble.

In peer-to-peer lending, individuals borrow money directly from deep-pocketed counterparts instead of going through banks. The outstanding balance of such lending totaled 816.2 billion yuan ($118 billion) at the end of 2016, just over twice that of a year before, according to research firm Yingcan Zixun. Many users put up real estate as collateral to take out short-term loans that usually have terms of less than a year. Transaction volume reached 2.063 trillion yuan, roughly 2.1 times the sum of the previous year.

Beijing is clamping down by taking such measures as adjusting lending caps. There were 2,448 peer-to-peer lending brokers operating in the country at the end of 2016, a drop of 985 companies in only a year.

Those with money to lend are drawn by "high interest rates you can only find online," says an official at Yingcan. Lending yields returns of just over 10% on average -- around three times the country's long-term interest rates. Chinese stocks fell by at least 10% in 2016, and smaller investor, who find real estate purchases too costly, use peer-to-peer lending due to the lack of options.

But a number of loan brokers have defrauded customers. One company that went bankrupt in April last year bilked investors out of as much as 30 billion yuan. It had boasted of 8% to 12% returns on investment, but had not actually used the funds for lending operations. Inspections by regulators have found that roughly 40% of loan brokers have misappropriated or walked away with lender funds.

Users also increasingly fund property purchases with peer-to-peer loans, driving up asset prices and causing fears of a bubble.

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