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Chinese online lender delinquencies wipe out $4bn this year

Outrage mounts as government hastens to nip financial risks

Security personnel surround a woman in Beijing on Monday during protests against peer-to-peer lending losses.   © Kyodo

SHANGHAI/BEIJING -- More than 300 internet lenders in China have failed this year as the government presses forward with deleveraging efforts, defaulting on 30 billion yuan ($4.39 billion) in repayments to spark investor outrage and depress the stock market.

Groups of demonstrators headed to Beijing's posh financial district on Monday to protest losses from peer-to-peer lenders, drawing a heavy response by the police. As of Tuesday morning, the area was under lockdown as police vehicles cut off access to offices of state financial regulators. Security forces waited on standby in large buses, on the alert for any unexpected activity.

"Many police vehicles were blocking the roads, and it was a large disturbance," said a man in his 20s who works for an international investment bank, describing the scene on Monday. "I've never seen such a sight in this normally quiet financial district."

It is nearly unheard of for the usually-quiet area, 3 km west of Tiananmen Square, to require a heavy police presence. The disturbance indicates how deeply P2P lending has shaken up China's financial sector. Such platforms have taken off due to the ease of striking deals and the generous returns backers can expect.

Beijing is hardly the only place where wronged P2P investors are speaking out. Hangzhou, a wealthy city southwest of Shanghai, had to use two sports stadiums last month as forums where officials heard complaints from citizens.

This year alone, 20 big-name lending enterprises have defaulted on a total of 23 billion yuan through the end of July. Defaults at smaller players typically top out at tens of millions of yuan, but the estimated total from 330 failures will exceed 30 billion yuan. The appraisals do not include those P2P lenders, for example, that promise to repay investors over a number of years. It is unclear if these operators will keep their word, and it is likely the losses will add up.

Other areas of concern include so-called trust products and asset management plans sold to wealthy investors. Originators have dragged their feet in paying back principal and interest, and defaults for these two investment categories have ballooned to approximately 12 billion yuan this year. In contrast, defaults totaled a mere 1 billion yuan to 2 billion yuan in 2017.

As opposed to internet financing, many trust products park funds in a small number of development projects, corporate bonds and corporate financing. The vehicles often lure hapless investors by telling them the assets are backed by the government. One state-owned enterprise in Anhui Province guaranteed principal and interest payments on a particular trust product that is now 300 million yuan behind in payments.

That defaults have hit instruments involving state-owned companies indicates how far the Chinese leadership is deleveraging excess debt. President Xi Jinping and other top Communist Party officials decided at the end of July to prop up the economy through a "proactive" fiscal policy. But financial authorities have ordered banks to carefully screen loan applicants, which has tightened the spigot for small to midsize businesses, as well as for some corporations owned by local government authorities.

The hardships at internet lenders also stem from the clampdown on excessive debt and financial risks. It is said that 80% of online operators do not segregate investor capital from operating funds. If banks cut the funding supply, weakly positioned net lenders would hit an impasse.

Authorities have determined that internet financing helps to artificially extend the lives of cash-strapped small companies. That and the rampant fraud has informed the policy decision to shrink the size of the market, which had grown past 1 trillion yuan.

There are now fewer than 1,700 net lenders in good financial standing, just half the number from two years ago. The club is expected to shrink below 1,000 by year's end as failures and business closures continue apace.

China's war on debt is starting to produce visible side effects. Defaults on corporate loans have now exceeded 34 billion yuan as of the end of July, and are on track to top the annual record of about 40 billion yuan logged in 2016. Aggregate defaults from corporate debt, trust products and online loans are approaching 80 billion yuan.

The widespread delinquencies have sapped the appetite of institutional and retail investors left high and dry. Financial markets have become sensitive to credit risks, with Chinese equities struggling to draw investors.

The benchmark Shanghai Composite Index is trading around 20% below its level at the start of the year. Closing Tuesday at 2,779 points, Shanghai equities are now within striking distance of the post-bubble low of 2,655 plumbed in January 2016. Together with the trade war with the U.S., China's problem with creditworthiness has become a drag on stock prices.

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