BOFIT Viikkokatsaus / BOFIT Weekly 2016/35

In the latter half of August, Chinese officials released regulations on direct online peer-to-peer (P2P) lending. An individual is now permitted to borrow no more than 200,000 yuan from a P2P lender or platform and the total value an individual’s P2P borrowing may not exceed 1 million yuan ($150,000) at any time. The limits on corporate borrowing are five times higher. Moreover, P2P firms that conduct most of their business online are now banned from engaging in activities such as taking deposits from the general public, sale of asset management products or giving loans guarantees.

The crackdown had been planned since last spring, after the Ezubao P2P platform, which was set up in 2014, turned out to be a 50 billion yuan ($6 billion) pyramid scheme. Bloomberg and the Yingcan Group, which tracks P2P lending, report that the volume of P2P loans last year rose to 1 trillion yuan ($150 billion). As of July, P2P firms had matched 3.4 million investors with 1.2 million borrowers. Credit offerings vary from consumer loans to high-risk corporate loans. The average interest rate on P2P loans this summer was 10.3 %.

Even if the volumes of P2P lending and the numbers of investors and borrowers are miniscule relative to China’s financial markets overall, the concern is the explosive growth and fraud opportunities in online shadow banking activities and the possible spillover effects. For example, the Ezubao scam directly affected 900,000 investors.