March 17, 2017 12:22 pm JST

China's yield-strapped investors spark peer-to-peer explosion

Loosely regulated lending platforms harbor heavy risks

YUSHO CHO, Nikkei staff writer

An Audi sedan offered as loan collateral on Tutengdai.com.

SHANGHAI -- Peer-to-peer lending is surging in China as conventional financial products lose their appeal -- creating new opportunities and substantial risks for yield-hungry retail investors.

Outstanding peer-to-peer loans -- funds lent by one individual to another through the internet -- stood at 885.7 billion yuan ($128 billion) in China at the end of February. That is eight times the level of barely two years ago.

On sites such as Tutengdai.com, prospective borrowers propose a wide range of collateral and substantial interest rates to lenders willing to put up cash. A typical post requests a 230,000 yuan, two-month loan at 12.5% annual interest, backed by an Audi A6 sedan. The site operator holds on to the car's keys, ensuring the borrower follows through.

Companies are getting into the game, borrowing hundreds of thousands of yuan in operating capital. Lending services are now offering to choose investments for customers. For funding riskier borrowers, lenders can expect yields on the order of 8-12%. These loans turn over quickly in many cases, often in less than a year.

Best option

China's peer-to-peer lending balance stood at just 103.6 billion yuan at the end of 2014, according Yingcanzixun.com, a site tracking the peer-to-peer industry run by Shanghai Ying Can Investment Management Consulting. Within a year, that surged to 406.1 billion yuan. Lending could top 1.3 trillion yuan by the end of 2017, an executive with Yingcanzixun predicted.

This rise comes amid a dearth of other viable investments. Consumer prices in China are growing at around 2% annually. But one-year bank deposits pay a meager 1.5%. For investors fearful of losing out to inflation and willing to take on a certain amount of risk, the peer-to-peer market is a perfect match, offering returns of a hefty 10% or so.

Retail investors' retreat from stocks has also fed the industry's rise. China's stock market tumbled more than 10% in 2016, even after a major crash the year before. During the National People's Congress -- the annual legislative session that began March 5 and ended Wednesday -- reports emerged that authorities had banned companies managing investment funds from selling more stocks than they bought. Such an action is a sign that the market has a long way to go in winning back investors' trust.

Growing pains

Yet the peer-to-peer industry's climb has been anything but calm. In late January, as China prepared for the Lunar New Year holiday, a person claiming to be a top executive at lending platform Laicaijie.com bade "farewell to greedy investors" in a post on the site. The person claimed to have absconded to "some island overseas" with nearly 100 million yuan in investors' money, explaining the funds were laundered by way of divorce proceedings, among other measures. By the time the holiday was over, the firm's Shanghai offices were empty.

Smaller-scale improprieties, such as late interest payments and delayed repayment of loan principal, are also widespread. Financial authorities have ordered peer-to-peer lending services to manage users' funds separately from other capital, leading a large number of platforms to shut down. Just 2,335 platforms were operating at the end of February, or over 1,000 fewer than at the end of 2015. "The industry has consolidated, with the top 100 firms now handling around 90% of the capital, and incidents such as fraud have decreased," the Yingcanzixun executive said.

Premier Li Keqiang issued a strong warning on the risks of internet finance in his March 5 report to the congress. Whether Beijing can ensure that the growing peer-to-peer market remains sound could determine how much faith the world has in Chinese financial markets overall.

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