China’s P2P Risk

The problem with camouflaging bad loans by mixing them in with good ones is that no one will want to buy any of them — thus creating the illiquidity you're trying to avoid.
The problem with camouflaging bad loans by mixing them in with good ones is that no one will want to buy any of them — thus creating the illiquidity you’re trying to avoid.

The Chinese government legalized peer-to-peer lending platforms in 2015. P2P sites attract money from individual investors – mostly savers – by offering them extraordinarily high yields. They lend this money at high interest rates to borrowers who have trouble getting loans elsewhere – classic subprime. By the end of 2017, there were over 8,000 P2P platforms, according to the People’s Bank of China, with over 50 million registered users. By the end of June, in a little over two years, the industry had gone from zero to $190 billion in outstanding loans.

That was the peak. But the fun didn’t last long. Borrowers defaulted on their loans or just absconded with the money, and the platforms began collapsing. In May this year, regulators stepped in. By the end of July, 4,740 P2P lenders had collapsed or where shut down.

Left holding the bag were millions of investors – mostly these savers who’d tried to make a better return on their savings in this newfangled risk-free manner. Suddenly, regulators told them that they should be prepared to lose their entire investments in these products.

The situation continued to follow the Chinese script. The savers started protesting in the streets. “P2P refugees,” as they called themselves, headed for Beijing Financial Street, where the People’s Bank of China has one of its buildings, and where most regulatory agencies are located. They were met by a large contingent of police.

Social unrest and display of public anger that might get out of hand being the greatest fear of the Chinese government, it was time for a bailout – particularly after the government-ballyhooed stock market collapsed for the second time in 2015 and remains collapsed to this day.

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See Also:

(1) IMF: Chinese banks are disguising a massive amount of bad debt

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