China has over the past few years experienced periodic outbreaks of defaults by online peer-to-peer (P2P) lending platforms, with the scale increasing each time.
Another such wave has struck in the past few weeks, with several large platforms going bankrupt. The most influential of these was Tuandai, based in Dongguan, Guangdong Province.
Following Tuandai’s default announcement, more than 1,000 investors protested in front of the Dongguan People’s Government building, where the Chinese Public Security Bureau dispatched several hundred officers to stand guard.
Since last month, P2P lending platforms are reported to have gone into default in many of China’s major cities, including Dongguan, Chengdu, Shenzhen, Hefei and Hangzhou.
The companies include KDW, Formax, Limin, Lingqianguan, Zhongjin Gold, QBM and ZCT, but the most startling is the sudden demise of Tuandai, which involved loans exceeding 14.5 billion yuan (US$2.16 billion), with 220,000 investors likely to lose money.
Tuandai started out as one of China’s Internet financial technology unicorns — start-ups valued in excess of US$1 billion.
Its chief executive officer, Tang Jun (唐軍), is a start-up mentor at an incubator for young innovators and entrepreneurs in Dongguan. Tang has received numerous official accolades and often teaches classes for people born after 1985 on how to set up and finance a company.
However, this wave of large-scale defaults might have happened because lenders have used start-ups for illegal fundraising.
P2P online lending platforms normally function as intermediaries between lenders and borrowers, while collecting a fee for the service. This mode of operation does not create much scope for large-scale defaults to occur.
However, the firms that have run into trouble were not content to just earn service fees. Some of them have used large numbers of dummy accounts to borrow money through their platforms and divert it to other purposes, while continually taking out new loans to repay old ones.
To borrow money, they have to attract lenders by offering higher interest rates, but any Ponzi scheme is bound to collapse eventually.
In theory, P2P lending is good for lender and borrower, because it enables them to save on the operational costs involved in bank loans. This allows lenders to earn a higher rate of interest than they would from a bank deposit, while borrowers pay a lower rate of interest than they would on a bank loan.
However, because of a lack of supervision in China, lending platforms are not transparent and can be turned into cash machines for their operators.
In a chain reaction over 42 days following last year’s Dragon Boat Festival, 104 P2P platforms were hit by defaults, with 7 trillion yuan in loans disappearing and tens of thousands of people losing their money.
Now that benchmark company Tuandai has declared that it is in default, it remains to be seen whether this will induce lenders on other platforms to demand their money back, or whether it will trigger a new wave of defaults or sets off wider sociopolitical repercussions.
Honda Chen is an associate research fellow at the Taiwan Academy of Banking and Finance.
Translated by Julian Clegg
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