Should we at all be surprised that the Chinese P2P market is booming? Well no we shouldn’t, it has been clear from the recent highly successful Alibaba IPO, that one of the most common refrains from Investment Bankers about China “is that their capital markets are in keeping with something out of the 19th Century” – http://goo.gl/i3Ls7O . Despite one of the highest savings rates in the world, there was never going to be an opportunity for Alibaba to raise significant capital domestically hence the founder Jack Ma to look to the US and Global opportunities.
Rise of P2P in China
Without a well developed capital markets Chinese small and medium sized businesses find it extremely difficult to source funding. A way to alleviate this has been the rise of P2P lending over the last 3-4 years. According to Nomura Research, http://goo.gl/X5XIP3 determining an exact count of P2P lenders varies. Officially the People’s Bank of China reported 350 at the end of 2013. Another portal Wangdaizhijia suggests the number is now closer to 1184, with the better known sites being Paipaidai, Lujinsuo and Yixin.
Regulation and Oversight Difficult
With a current population of 1.357bn people having 1184 P2P lenders is quite possible. But with these lenders comes increased risk particularly for investors. The market is unregulated, JPMorgan Chase & Co. report http://goo.gl/i3Ls7O that even though traditional banks have scaled back their lending – the shadow banking system is booming and since 2010-2012 has doubled in size to some US$6 trillion. Where is this coming from, well both the PBOC (People’s Bank of China) and the CBRC (Chinese Banking Regulatory Commission) have tried to slow down the growth of this shadow banking system. However, a strategy used among Chinese banks involves disguising corporate loans as bank-to-bank loans. These loans help banks skirt regulatory limits on lending and at the same time hide the riskiness of the corporate loans, because they appear as less-risky loans to other banks.
So the CBRC now recognises the importance of P2P lending for small to medium sized companies and though keen to regulate P2P they do not want to shut it down. It is quite likely that what maybe introduced according to Nomura is some regulations around market-entry standards, minimum capital, introduction of a qualified investor program and some mandatory reserves set aside for loan losses. The success of these potential new regulations will be looked closely by all National Regulators including Australia. The benefits of P2P lending are so large, but reducing any risks to investors is paramount.