Regulation Zeroing In On China’s P2P Lenders

The future of the $21 billion Chinese P2P lending industry looks a lot more gloomy with the government’s latest investigation into the “illegal business activities” of Ezubo, the largest P2P lending platform in China.

The P2P lender saw $11 billion in investments from about a million investors before its offices were shut down and raided by the government, according to Forbes. Local authorities also froze the company’s account at the China CITIC Bank, which reportedly held about 1.1 billion yuan in risk reserve deposits.

The investigation into Ezubo’s lending practices comes at a time when the Chinese government is expanding its crackdown on P2P lenders in China.

Last year, Chinese P2P lenders lent over $32.5 billion, giving out about four times as many loans as any other country in 2014. However, the number of cases of borrowers and lenders (almost half) “running away” saw a sharp spike this year, pushing the tally for repayment issues to a record high.

The rise in repayment issues comes against a dizzying growth of the P2P lending market in China, which is being fueled by heavy investment from top players. Last year, for instance, Alibaba announced plans to create a $163 billion P2P loan market in China.

According to data research company Wangdaizhijia, about 824 P2P platforms have been shut this year, so far — a 300 percent increase from 2014, Reuters reported.

“A lot of money is coming in quickly, and [the platforms] don’t know how to manage it,” said Ling Kong, CTO of Dianrong, a leading Chinese financial services company. “Without the right risk management and asset allocation, there’s also a lot of systematic risk.”

To get a better grip over the situation, the Chinese government drafted a set of guidelines, jointly issued by a body of 10 agencies, including the central bank and banking and security regulators this July. With tightening laws, as many as one-third of the 3,700 online P2P lending companies were cited as “problematic,” according to Forbes.