Confidence in China’s $195 billion peer-to-peer lending industry is under strain as reports of defaults and closures by lending platforms has surged in recent weeks.
At least 57 P2P operators have announced sudden closures, defaults on payments, or have come under police investigation in the first two weeks of July, according to Bloomberg. This follows on from the 80 such cases reported in June, which was the highest number seen in two years.
About 50 million people are active in China’s P2P market, facilitating some Rmb 1.3 trillion ($195 billion) of outstanding loans, often with short maturities. Where usually investors must wait until their loans mature until redeeming their money, some are now demanding repayment from company offices or selling on their debt at a discount.
China currently houses the world’s largest P2P industry, where small borrowers can gain access to credit albeit in a high-risk and poorly regulated market. Beijing has been determined to stamp out any wider threats posed to the financial system by P2P platforms, though the resultant pressure on service providers has shaken investors, who fear losing all their money currently held in high-yield products.
Whilst P2P constitutes a small fraction of China’s $10 trillion shadow-lending system, the problems demonstrated over the past two months also threaten other credit providers who are suffering under the effects of deleveraging, including higher defaults and restrictions on implicit guarantees on risky investments.