Chinese regulators estimate that their P2P lending crackdown resulted in $115 billion in losses for investors

• Chinese regulators estimated that their P2P lending crackdown has resulted in $115 billion in losses for investors.
• And stricter regulations plus challenging macroeconomic conditions will deter new entrants and lead to diversification. 

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The Chinese Banking Regulatory Commission’s crackdown on the peer-to-peer (P2P) lending industry has so far resulted in over $115 billion owed to investors in unpaid debt, Crowdfund Insider reports. The multiyear initiative will likely last to the end of 2020.

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The staggering losses are the product of an industry that was poorly regulated and received mammoth levels of investment. At its peak in 2018, the Chinese P2P industry’s outstanding loans had swelled to over $218 billion, outstripping even the $120 billion to $150 billion US market at the time, per McKinsey. A nonexistent regulatory framework for the P2P industry meant low barriers to entry, allowing thousands of players to enter the space in a few years.

And the country’s large underbanked population and consumer and small business segments being neglected by the big four Chinese banks further supported the rapid proliferation of P2P platforms. The huge volumes of capital flowing through them without oversight meant that fraudulent practices went undetected: It was estimated in 2016 that 40% of the platforms were Ponzi schemes. For example, when Ezubao’s Ponzi scheme collapsed in 2016, it had caused roughly $9 billion in losses.

We think the Chinese P2P space will remain sparsely populated going forward, and those platforms left will target diversification and exits due to the current macroeconomic conditions.

• The regulatory clampdown put most P2P lenders out of business, and the newly stringent regulatory environment will prevent players from entering the space. As the scale of the fraudulent activity started to become clear in 2016, regulators began to crack down — and the number of Chinese P2P lending platforms plummeted from 6,000 to just 29 between 2016 and 2020, leaving many investors out of pocket. Furthermore, the new capital requirements for lenders are the same level as those required of a commercial bank, meaning the barriers to entry are much higher. It’s now likely that the industry will remain uncrowded for the foreseeable future.
• Ongoing regulatory scrutiny and the current economic crisis will likely see surviving lenders expand into new services. While the collapse of most of the competition may favor remaining P2P platforms in terms of market share, we expect the majority will still pursue diversification. Regulatory scrutiny shows no sign of abating, and onerous stipulations, such as strict funding requirements, might stifle the growth of the sector, making it more unappealing to incumbent players, per McKinsey. What’s more, the economic crisis has increased the risk of SMB defaults and delinquencies, which will only deter investors from their platforms. Thus, we expect the majority of the remaining P2P lenders to follow the lead of Lufax and explore diversification, with a longer-term aim of moving out of P2P lending.

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