China's P2P industry undergoing a shakeout
EDITOR'S NOTE: According to P2Peye.com, one of China's major virtual communities which tracks the operations of peer-to-peer (P2P) lending platforms, more than 250 such platforms went bust in July alone. The massive collapse has spread panic among investors, who have rushed to withdraw their investment from all P2P platforms, putting even greater pressure on the sector. What caused the massive collapse of P2P lending platforms and what should be done to ease the situation? Three experts share their views with China Daily's Liu Jianna. Excerpts follow:
Mass bankruptcy's impact is expected to be limited
Li Jianjun, dean of the School of Finance, Central University of Finance and Economics
Hundreds of P2P platforms have gone out of business in the past few weeks because of a combination of reasons: tight financing, economic downturn in the real economy and the platforms' unruly behaviors including raising funds for their own projects. It seems the P2P business sector would work best in a "market of oligarchs", which would allow a few big P2P platforms with good credit to offer premium services.
More often than not the presence of too many players in a market leads to blind competition, resulting in the accumulation of systemic risks. In this sense, the collapse of P2P platforms would help accelerate the integration of the market leading to the creation of a more sound and healthy market.
Yet the recent wave of bankruptcies will have some negative effects on the real economy－the closure of 168 Linjia convenience stores in Beijing being one such example. According to Beijing Youth Daily, there are clues to suggest the sudden closure of the stores can be attributed to the bankruptcy of a P2P platform.
Since small and medium-sized enterprises comprise a large percentage of P2P loan borrowers, they are expected to bear the brunt of the massive collapse of such platforms.
Nonetheless, the fact that P2P loans account for a small percentage of the total amount of financing suggests the impact of the P2P platforms' collapse might be limited.
As China is yet to establish a comprehensive regulatory system for the P2P sector, the authorities need to strengthen their supervision of this relatively new business form. And the first priority of the regulatory system should be to build a complete set of laws and regulations, which will make clear the legal status and nature of business of, and the operational requirements and criteria for P2P platforms, as well as the main body in charge of their oversight.
In addition, industry associations should play a bigger role in tracking and promoting the healthy development of the P2P sector. For instance, they could build a database encompassing the operations and risks of P2P platforms, so that warnings can be issued to investors as soon as the first signs of insolvency emerge.
Besides, investors should improve their financial knowledge and learn to assess the financial risks within the P2P programs. Some investors rushed to embrace the high-return programs despite not having enough knowledge about the platforms and loan projects, while others assumed the government would take the responsibility for their investment failures if any of the platforms went bust.
This does not reflect their due and sufficient understanding of the industry, something that one expects from smart investors. So local governments have to take necessary measures, such as launching publicity programs, to help investors better understand and be well prepared for any turmoil in the market.
P2P platforms have to go back to basics
Cao Fengqi, a professor of finance at Guanghua School of Management, Peking University
Of late, China's P2P sector has been in turmoil with an average of nearly eight P2P platforms going bust every day last month. The fundamental problem with the P2P sector is that a large number of platforms have undergone radical change and no longer fit the original description of P2P lending.
As information service agents, real P2P platforms are neither supposed to charge interest on loans nor absorb deposits, which are characteristics that separate them from banks.
Instead, they are supposed to generate revenue by connecting borrowers and lenders.
But P2P platforms in China have largely absorbed capital and given loans at will, which means they have functioned more like banks but without due oversight. As a matter of fact, not only P2P platforms, but also private equity firms have somewhat deviated from their tracks in China.
Yet that does not mean this should be the end of P2P platforms, because they supplement the banking industry and could help SMEs that have been finding it increasingly difficult to get adequate financing. The first priority is to regulate the P2P platforms' behaviors and operation, in order to ensure they really and solely serve as information service agents, which is exactly what they should have done in the first place.
Strengthen rule of law in online finance sector
Qiao Xinsheng, a professor of law at Zhongnan University of Economics and Law
When it comes to online financing, the rule of law should be further strengthened. To begin with, there is a need to distinguish between civil conduct and criminal conduct. In private lending, the borrower needs to take only civil liability in accordance with the General Principles of the Civil Law, Contract Law and other administrative laws and regulations on private lending.
But some online lending platforms and individuals have evaded their duties on the pretext that it would unnecessarily increase the operating costs and corporate debt, which has resulted in severe losses for investors. Under such circumstances, the judicial interpretation given by the Supreme People's Court should be used to treat such cases as criminal cases, instead of civil cases.
Second, a modern legal system should be established to supervise the development of online finance. Not surprisingly, the method of divided operation and the management of securities, banking and insurance industry have been encountering problems, such as how should the China Securities Regulatory Commission manage the flow of capital from insurance companies to the securities market. This confusion in part prompted the authorities to integrate the China Banking Regulatory Commission and the China Insurance Regulatory Commission into the China Banking and Insurance Regulatory Commission, in a bid to help build a modern financial regulatory system.
Third, given that the Chinese government has largely allowed the free, sometimes disorderly development of the internet industry to encourage innovation, the development of internet technology in China indeed risks spiraling out of hand. For instance, some e-commerce businesses took the lead in launching the third-party payment business, which eventually prompted the People's Bank of China to introduce regulations to catch up. To ensure timely and comprehensive supervision of the internet industry, such a delay in oversight and legislation should not happen again.
Moreover, the development of China's financial industry has at times deviated from the right track. For example, some people insist that online finance should be aggressively promoted, ignoring the fact that China is a high-savings country and direct investment in online finance could heighten the risks manifold.
Also, the relationship between online finance and the real economy should be strengthened to ensure that financing serves the development needs of the real economy. Otherwise, confusion and disorder may increase, which could lead to a financial crisis.
Therefore, the National People's Congress, China's top legislature, should enact a financial law or savings law as quickly as possible to safeguard investors' interests and the authorities should clean up the online finance industry and impose stricter control on the third-party payment business, so as to prevent the spillover of chaotic online financial activities.