Peer pressure

Gibb: Lufax’s loans are changing

China’s P2P industry, or ‘peer-to-peer lending’, is no more. Guo Shuqing, chairman of the China Banking and Insurance Regulatory Commission (CBIRC), announced this week that the number of operators had been “zeroed out” by mid-November, dropping from more than 5,000 in 2017 and from 29 in June.

The Chinese government has eliminated an industry that often looked like a giant Ponzi scheme, precipitating waves of investor losses. Or as one asset manager in Shenzhen described it to Huxiu.com: “P2P matched poor quality assets to inappropriate investors.”

Coverage of the sector’s demise has been muted in the media, although newspapers have highlighted that at least Rmb800 billion ($122.5 billion) in bad debt is still outstanding. These debts will be even harder to recover because P2P creditors comprise a horde of smaller retail investors rather than a handful of major institutions that know their way around the bankruptcy courts. Caixin magazine also argues that although the financial risks in P2P lending have now been fully exposed, “the impact on the financial system and the losses suffered by financial investors will not simply disappear now that the sector has been reined in”.

While P2P in its purest form is dead, a small group of lenders is still winding down, especially in handling repayments of existing loans. Regulators will also need to tighten supervision to ensure that the problem does not rear its head in another form, Caixin says.

The CBIRC is aware of the dangers and has just published a new analysis of China’s shadow banking sector. Lending outside the traditional banks (at lower credit standards) amounted to Rmb39.1 trillion in 2019, using a narrower definition of shadow banking practices (including investments by interbank special purpose vehicles, interbank asset managers, entrusted loans, trust loans, P2P and non-equity private funds). However, lending was much higher at Rmb83.8 trillion ($13 trillion) in a broader definition that includes asset securitisation, factoring, capital investment trusts and a host of other products.

The CBIRC said that financing structures have become simpler and safer in general terms. But it warned that many institutions still have sizeable off-balance-sheet assets and are offering products with implicit guarantees.

As we reported in WiC519, government nervousness about the potentially destabilising impact of the fintech players has led to newly proposed restrictions on lending. These were partly responsible for the shelving of Ant Group’s IPO last month, which was set for a record fundraising in Hong Kong and Shanghai.

An IPO that did get over the finishing line came courtesy of Lufax. It was originally a leading P2P platform but transformed itself into a lender to small and medium-sized enterprises (SMEs), making much of its money by matching institutional investors with small business borrowers. That cleared the obstacles to the public equity markets this year, where it raised $2.4 billion on the New York Stock Exchange at the end of October.

The spin-off from the Shenzhen-based insurer Ping An has created a profitable niche in its parent’s ecosystem. About 40% of its new loans go to customers of its parent, who tend to be more creditworthy. Ping An’s insurance arm also provides higher levels of credit guarantee than Lufax’s rivals, which attracts more institutional lenders.

All the same, Lufax’s shares fell in New York on news of Ant Financial’s difficulties and it is also having to adapt to the regulatory environment. For instance, new rules on annual borrowing rates have seen caps lowered – to four times the one-year loan prime rate (which is currently 3.85%) according to S&P Global. Lufax is also raising the capital contribution that it makes to loans and increasing the number of banks that it works with on lending.

“The real purpose here is for platforms that are cooperating with banks to have more skin in the game, bear more risk and have sufficient capital to back up that risk,” Lufax CEO Gregory Gibb informed investors on an earnings call last week.

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