My first trip to China was back in 2014 when I was invited to speak at a closed door meeting with Chinese regulators and leading P2P lending platforms. They wanted to learn about the US market and trends I was seeing here at the time.
Back then new platforms were launching pretty much every day as p2p lending became the hot new investment. The number of platforms grew to well over 3,000, a number that everyone agreed was not sustainable. But new platforms kept on launching, attracting both investors and borrowers with relative ease.
Five Platforms a Day Are Failing Right Now
We all knew the party was going to end at some point and it looks like 2018 will be the year of reckoning. According to industry data provider, Wangdaizhijia (loosely translated as Online Lending House), platforms are failing at a rate of around five a day with 114 platforms shutting down between July 1 and July 24.
Many investors are losing their money as platforms either shut down completely or suspend withdrawals. While some platform failures have been due to outright fraud it seems that most have been hit with much higher default rates than expected. As we have learned in this country in recent years underwriting unsecured consumer loans is hard. It requires deep knowledge of consumer credit and even then positive investor returns are not guaranteed.
In a recent article in the South China Morning Post (SCMP) , the head of the Beijing Internet Finance Association, Ning Tang, who is also the founder of CreditEase, was interviewed and they had this to say about him:
While he cautions investors to exercise better judgment to avoid fraudulent platforms, Tang insists that P2P is a solid investment method with a proven track record in China and overseas for more than a decade. The reputable P2P platforms focus on diversified investments to safeguard returns.
Ning Tang has spoken at LendIt’s events both in the USA and China and is one of the pioneers of the industry. Reputable platforms seem to be doing just fine as they have not over promised on returns and have not been hit with as many defaults.
My Message to China: The Industry Will Survive
While nothing like the scale being experienced in China, in the US we had a major slowdown in the industry recently as defaults rose and investor demand fell. It started in late 2015 and then with the resignation of the LendingClub CEO in 2016 the industry took a significant downturn. Some platforms went out of business. Many investors decided they had had enough and stopped investing.
But here we stand more than two years removed from the worst crisis in the history of online lending in this country and the industry has recovered. Originations are growing, investor demand has returned and many companies are in a much stronger position than they were two years ago when things looked very grim.
Now, the scale of China’s crisis is much larger and unlike in the US many investors have been completely wiped out. But as Ning Tang said in the SCMP article borrower demand remains strong. People the world over have a strong need for credit and in a growing economy this demand will keep increasing. Someone has to serve these people and the online lending companies are in the best position to fulfill that demand.
In a couple of years’ time when we look back on China’s annus horribilis I think we will see it was a healthy and necessary correction for the industry. Of course, the fact that so many investors were wiped out was unfortunate to say the least and that will have a lingering effect. Most of those people will not trust their money to an investment like this again.
Like any industry there are a few well-funded and strong players who can weather storms far better than their weaker brethren. I expect most, if not all, of the major online lending platforms in China will survive. Some of the middle tier platforms will also survive but pretty much all of the weaker platforms will fail.
A Sustainable Number of Platforms
At 1,836 platforms reportedly still operating I fear this crisis is not close to being over yet. How many successful platforms can China sustain? I don’t know but I suspect the number will be well under 1,000. In the meantime many investors will try to get their money out.
Hopefully, investors will have learned a hard lesson. You should never, ever put all your investments in one basket or one asset class for that matter. While I have been a serious cheerleader for p2p lending for many years now I still have less than 25% of my total assets in this space.
Now, obviously I have a somewhat vested interest in the industry’s success in China. LendIt is hosting our third annual LendIt Fintech China conference in Shanghai in September. While this conference is focused on far more than online lending, in the past we have had significant support from this industry. I want to see it not just survive but thrive in China. And I am confident in the end it will.
I recorded this short video below that will be translated into Mandarin for our Chinese audience.
