The rocketing growth of Chinas P2P lending business has attracted much overseas attention. In 2018, the size of Chinas P2P industry was greater than the total for all other countries in the world, and the outstanding loans in China were RMB 1.49 trillion.
Foreigners considered this success to be the result of the maturity of fintech or changes in consumer behaviour. However, the main reason foreigners misunderstood lending in China was simply that the reality was hidden under the water.
The following 3 forces contributed to the growth of P2P lending in China:
I. High National Saving Rate at 46% of GDP
Based on an International Monetary Fund report in 2018, China has the 2nd highest levels of savings in the world. In fact, China was continually been in the Top 5 over the past 8 years.
II. Looseness & Lack of Lending-related Regulation Before 2016
The number of online P2P lending platforms increased from 15 to 3,844 during the period from 2010 to 2015 according to figures from Statista.com. The number of lending service providers dropped subsequently to 2,448 in 2016.
III. Unmet Financial Demands
The Chinese financial system is dominated by the banking sector, responsible for almost 75% of the economys capital, a much higher percentage when compared to the average of less than 20% in developed countries. This implies that the country is heavily dependent on the banking system for capital allocation.
The chain is broken in early 2016.
In early 2016, the Ezubao Ponzi scheme scandal launched the destruction of the ecosystem. This company was established in July 2014. The scheme promised to pay investors interest rates of between 9% and 14.6%, much higher than those offered by banks. As of 1st February 2016, the scheme was closed down. It attracted RMB 50 billion from 900,000 investors.
40% of P2P lending platforms were Ponzi schemes, and a significant number of P2P lending service providers were illegal or problematic. Even though over 100 new rules were gradually implemented by the authority after 2016, lenders lost the confidence of the market. This prompted investors to withdraw their money quickly and as a result businesses shut down.
Source: www.chinabankingnews.com
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