Banking & Finance

P2P or not to be?

Regulators look closer at peer-to-peer lenders as rumours swirl at CreditEase

Tang Ning w

Tang Ning: CreditEase founder calls bad debt talk “plain wrong”

The spotlight is back on the shadow banking sector following reports in the Chinese press about a potential default at China’s biggest peer-to-peer (P2P) lender, CreditEase. In mid-April, it was widely reported that the group has been having problems with Rmb800 million ($128 million) of loans connected to a real estate developer in northeast China. The developer is said to have fled, leaving CreditEase with a nasty problem as its loan collateral is alleged to consist of several unfinished buildings in fourth-tier cities.

Guangzhou Daily went one step further, claiming that CreditEase has about Rmb1 billion in bad debt spanning real estate, energy and bulk commodities. The company attacked the reports as motivated by professional jealousy and just plain wrong.

In an internal letter to employees, founder and CEO Tang Ning claimed the group has Rmb264 million invested in real estate projects in the northeast and added the business is operating as normal. Moreover, he said that just 13.1% of the group’s Rmb50 billion asset base has been invested in property and that it is fully collateralised.

Nevertheless the media attention highlights increasing concerns over the P2P sector – which is supposed to connect smaller borrowers and lenders via the internet. And unusually, some industry players have been calling for closer government supervision, fearing the consequences of fraudulent behaviour from rogue sites.

Tang Ning himself has long been aware of some of the dangers, telling the Financial Times back in 2012 that, “When you ask Chinese people if they trust the credit system, 10 out of 10 say no. That is a huge difference (from the US) and represents a huge opportunity or, if not done well, a huge challenge.”

CreditEase was established in 2006 but China’s P2P sector only really got going in 2009. Since then it has grown enormously with the number of lender websites said to be anywhere between 800 to 1,000. Lending is also estimated to have jumped to about Rmb68 billion in 2013, according to iResearch, a massive increase on the Rmb22.86 billion lent via P2P transactions the year before.

Still, the nascent industry has problems.Last year, 74 platforms went under and year-to-date, 27 have gone down with Rmb600 million of investor money, according to industry aggregrator Wangdaizhijia.

Beijing-based P2P platform China-Europe Winton Fund accounts for the bulk of these losses, disappearing in February with Rmb400 million of its 2,000 investors’ capital.

Various government agencies have sounded warnings about the sector since P2P webite collapsed in 2011. But Beijing only really got serious about sorting it out last August when it set up an inter-ministerial coordinating body.

One of its first tasks was to establish a research team on internet finance and on Monday its head, Liu Zhangjun, said the government has asked local governments to establish monitoring systems to identify cases of illegal fundraising, particularly the pooling of funds.

He also said that the CBRC, which will take the lead on P2P supervision, is drawing up draft regulations. Government concerns cover a number of areas ranging from Ponzi-like structures which suck in new money to repay other debt to maturity mismatches resulting from short-term funds being used to finance long-term projects.

“Currently, P2P lending has been growing rapidly. The number of new websites and the total loans they have issued have been rising rapidly too,” said Liu, the director general of the Office of the Interagency Anti-illegal Fundraising Taskforce. “From the government’s perspective there is a need for greater supervision.”

CreditEase runs a hybrid business model encompassing both on and offline financing. Tang Ning has repeatedly said he was inspired by Muhammad Yunus’s Grameen Bank to set up a micro-finance facility for individuals and small companies overlooked by the banking sector. But what started out as pure P2P started to change in 2012 when the company began branching out into wealth management products – packaging up various types of loans into fixed income structures to sell to wealthier investors looking for higher returns than they would get from bank deposits.

One such investor, Lin Yun, tells Beijing News that she now has 25% of her assets with platforms like CreditEase and Ping An’s Lufax, averaging a return of nearly 20% during 2013. “Such lending is high-yield, high-risk and I am mentally prepared,” she tells the newspaper.

The problem is that – in reality – many investors seem much more prepared for pocketing the high yields than for the likelihood that their capital might go up in smoke. CreditEase itself is said to have grown by a CAGR (compound annual growth rate) of more than 200% over the past three years and has even attracted investment from foreign private equity funds.

The company has never reported its earnings but Beijing News estimates that its cumulative loan volume amounts to more than Rmb10 billion, giving it almost a seventh of the P2P market.

Tang got started in the industry largely by happenstance. After working on Wall Street, he became involved with some vocational training institutions when he returned to China. He found that many of the students couldn’t afford to finish their courses and he began lending them the money to pay their fees. In due course, many of his friends pooled their cash with him, viewing the student loans as a reliable way to make a decent return.

Tang then scaled up his model, although Beijing News raised the central question of whether lending pooled funds is strictly legal. Analysing an earlier judicial interpretation by the Supreme People’s Court, the newspaper surmises: “It is illegal if CreditEase lends, but if Tang individually acts as the lender, it is not illegal.”

That being the case, it says it is a possibility that monies lent go through Tang’s personal bank account rather than a corporate facility. The company does not disclose whether this is the case.

What seems more certain is that the manner in which companies like CreditEase loan out their cash will be coming under increasing scrutiny as regulators get to grips with this murky sector.

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