China warned to avoid P2P lending mistakes in blockchain push

This article is co-written by Yujing Liu.

China has been warned to avoid the same mistakes with blockchain that it made with its peer-to-peer lending, as the government vowed a “thorough revamping” of the controversial lending platforms as part of a continuing battle against financial risk amid the domestic economic slowdown and the trade war with the US.

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A specially designated task force is in the process of working towards eliminating risks associated with P2P online lending platforms, the official Xinhua News Agency reported at the weekend, citing a task force statement.

The task force has been created in response to a series of online lending platform collapses that trapped the savings of millions of individuals who sought financial gain by lending through the platforms, with the resulting public uproar posing a severe challenge to the nation’s social stability. Ezubao, once China’s biggest P2P lending platform, folded in 2016, having collected 59.8 billion yuan (US$8.5 billion) from more than 900,000 investors.

But with interest in blockchain – the technology that underlies Bitcoin and other cryptocurrencies, many of which are still banned in China – on the rise after it was endorsed by President Xi Jinping at the end of last month, the government have been urged to take a more cautious approach following the expensive lessons learned from P2P platforms.

“What the government should refrain from doing is to participate directly in industry development plans. It’s better to be a referee trying to make rules and let market institutions tap [blockchain’s] development potential,” said Tang Jianwei, a senior researcher with the Bank of Communications.

“The government should not blindly push [technology speculation fever] nor should it simply close them down when problems emerge.”

Most of the P2P platforms will be shut down, others with fintech expertise and shareholder support will be transformed into small lending firms, while a select few with strong capital bases that are in full regulatory compliance will be transformed into consumer lenders.

“For the next phase, [the government] will firmly push forward the clearance of risk within the industry, steadily and orderly resolving the risks from the existing platforms and taking multiple measures to support the orderly winding down or steady transformation [of P2P platforms] to protect the legitimate interests of investors and safeguard stability,” the task force statement said.

It was initially hoped that P2P platforms would help address the stubborn fundraising problems faced by small firms and consumers due to their lack of access to credit following reforms of the state-dominated financial system. But many platforms were found to be fraudulent, while others had difficulty collecting loan payments to repay their investors.

The People’s Bank of China called for P2P industry risks to be resolved by the first half of 2020, although the latest figures show that progress has been faster than anticipated. The number of online P2P platforms in China has fallen to just 427 at the end of October, down 59% from the end of last year. The combined value of their outstanding loans plunged 49%, while the number of borrowers dropped 55% in the same period.

Many provinces are also shutting down all the P2P platforms within their jurisdictions. The municipality of Shanghai, the nation’s biggest city and financial center, announced last week that it would ban all future P2P lending services, while the central province of Hunan announced in mid-October that it would close the last 24 locally registered online lending platforms.

“It would take a rather long time [to tackle the P2P risks] relying on market forces. Closing all of them is certainly the simplest way,” added Tang from the Bank of Communications, with local governments under pressure to comply with the requirements of Beijing’s financial de-risking campaign.