|Alternative Funding Network|
2014 has been a balancing act for the Chinese banking system but has created an advantageous environment for alternative financial systems to thrive where it has faltered. In the case of P2P lending, 2014 has turned out to be a watershed year, with the number of P2P lending businesses rising from approximately 800 operational platforms in 2013, to 1,500 by Q3 of 2014, according to data from WangDaiZhiJia. The shape and development of the Chinese P2P marketplace has certainly been affected by the economic context within which it has grown. As the fastest growing P2P marketplace in the world, China’s P2P lending sector has developed rapidly in response to China’s particular economic context with respect to state-led monetary tightening, continued economic slowdown and the inability for commercial banks to service the ever-growing number of micro-businesses and small businesses seeking finance throughout the country.
At the start of 2014, the People’s Bank of China (PBoC) targeted inter-bank interest rates and continued a state-led policy to tighten the country’s monetary policy. For commercial banks, state-led enterprises and other financial intermediaries, the result translated to less lending. By H2 of 2014, restrictions on bank lending were relaxed but not signicantly towards businesses often deemed as too high-risk. As we enter 2015, the PBoC has given the OK for banks to issue more loans and has reduced limitations on loan-to-deposit rations in an effort to increase lending. Throughout 2014, the PBoC implemented a balancing act between monetary tightening and liquidity injections, in a hope to foster stability. This constant flux has created an advantageous environment for the fast-paced development of P2P but has not come without risks.
The P2P sector has filled a lending gap where state-led engines have faltered. As She and Zhang explain, Chinese P2P has moved from primarily consumer or micro-loan offerings, to commercial loans for commercial borrowers. SMEs that have been increasingly underserved by the Chinese banking community are turning to P2P lending. For many businesses unable to get a bank loan, the higher interest rates offered by P2P loans are acceptable and have attracted a steady stream of individual and institutional investors.
Yet, the development of P2P lending in China has exposed serious risk, from blatant fraud to poorly constructed operating systems. Tian reports that in October alone, 31 platforms went out of business, with many fleeing with lender funds never to be recovered again. In addition to blatant fraud, a vast majority of smaller platforms simply do not have the financial expertise or know-how when evaluating potential borrowers. This lack of preparedness from platform principals translated to unnecessary risk-taking, from offering loans to businesses or individuals who are fraudulent or have no ability to repay. As one article indicated, a major problem for many P2P platforms was their inability to cover bad performing loans. Platforms simply did not account for arrears or default. Rabinovitch indicates that the failure of a number of platforms in 2013 and 2014 was also due to the general economic slow-down felt across China, and the resultant monetary tightening. He notes that the PBoC’s withholding of liquidity coupled with jumping lending rates translated into a distressing environment for a number of P2P firms. As indicated by Ying, founder of P2P platform Pandai, “a lot of P2Ps have blindly copied each other and they don’t have a business plan that is robust enough to react to market changes. They’ve just focused on sales, scale and bragging to each other.” This view indicates that many of the platforms that failed throughout 2013 and 2014 failed as a result of a lack of operational skills needed for evaluating and executing forthcoming loans.
In response to this seemingly endemic risk, the emergence and development of tracking or rating companies that review and rank various P2P loans have combated the prevalence of unnecessary risk-taking and protected investors from bad platforms. WangDaiZhiJia is one such portal that reviews P2P operations in order to shed light on good and bad practices. Despite the good work of these types of P2P-related businesses, a call for regulation is eminent as there are clear limitations to how far their investigative eye can go. As Xu Hongwei, CEO of WangDaiZhiJia explains, “we’re not a government agency and we can only rely on what’s made public”. In the Fall of 2014, an official for the China Banking Regulatory Commission indicated that regulation for the sector was forthcoming, though no such regulation has yet emerged. Many believe that 2015 will herald a regulatory framework for P2P lending and help stamp-out fraudulent practices.
Though 2014 has seen a number of failures, there has also been plenty of positive development with respect to the main players. The most successful P2P players are those that have backgrounds rooted in related industries, predominantly in finance or internet-based industries. China Rapid Finance is primarily a credit management business that has leveraged their risk assessment tools and underwriting to create a branch of P2P lending, which helps eliminate some of the larger risk-issues indicated previously. Similarly, Lufax is the P2P lending branch of China’s largest insurance company Ping An. By creating a P2P lending division of the company, CEO Greg Gibb explains “their primary motivation is to create the largest online wealth management firm in China and [use] P2P as an inexpensive acquisition channel to acquire new investors.” Credit Ease, another Chinese P2P lending platform, has roots in wealth management and has utilized P2P activities and systems to provide an array of services to investors. Credit Ease is the largest P2P platform in the world and has achieved great success due to it’s underwriting abilities and off-line mechanisms.
Traditional financial institutions are not the only group to see value in P2P lending. PPDai.com, for instance, is a P2P lender that focuses lending to businesses selling via Taobao or Alibaba. Independently run, this lending platform has utilized different mechanisms such as user ratings, social networking, etc. to determine the viability of borrowers. Internet giant Alibaba has also entered the lending space with the launch of ZhaoCaiBao. Borrowers can access a P2P loan only upon successfully guaranteeing the loan sum from a financial institution, thus allowing the platform to make use of strict credit and risk assessment systems from external institutions.
China’s P2P sector has not only attracted interest from finance and internet strongholds within China, but has also begun to attract foreign players to the Chinese market. A prime example is that of Dianrong, lauded as the LendingClub of China due to its founder’s roots in the US-based P2P lending giant. Founder Soul Htite recently completed a large (currently undisclosed) funding round with Tiger Global. When drawing comparisons between US-based Lending Club and his newest venture Dianrong, Htite has indicated that there are huge differences between the two:
“While Dianrong promotes itself as the LendingClub of China, the business is quite different, as the Chinese financial services industry is far less developed. [Dianrong] has been helping to build the banking infrastructure in China, a feat never asked of LendingClub in the U.S.”
In fact, for the majority of P2P lenders active in China, it is this lack of existing infrastructure that makes the Chinese P2P sector so unique in comparison to other countries. Successful P2P lenders have been those who have been able to grow both vertically and horizontally, providing additional services to borrowers and investors that compliment lending activity. The largest emphasis has been placed on creating advanced credit assessment engines where they did not previously exist. It is no wonder, then, that the platforms that have endured and grown in 2014 were those with their own risk and underwriting capabilities.
As the market for P2P lending continues to develop into 2015, one thing seems to be certain - China will continue to be the fastest growing P2P marketplace globally, and will continue to do so in a manner somewhat distinct from pioneering UK and US platforms.