China’s P2P lending industry is in serious trouble as new Ponzi scheme allegations emerge

Photo credit: Mike Poresky.

2016 has been a terrible year for China’s online peer-to-peer money lenders.

Just a year ago, this sector was in the middle of rapid growth. Driven by growing consumer enthusiasm for investment and increased ecommerce participation, P2P startups sprung up (and got funded) by the hundreds. But then China’s A shares market crashed twice. Returns started dropping. In January, things went from bad to worse. A major P2P lender was outed as a Ponzi scheme, and investors lost billions. By February, major banks had begun withdrawing their support for the sector, and things were looking grim.

A few months later, things are still looking grim. Following the Ezubao Ponzi scheme debacle, Chinese authorities have tightened their supervision of P2P lenders, but that doesn’t seem to have helped. Now, reports are swirling that another Chinese P2P startup – the perhaps unfortunately-named Easy Richness – is under investigation for being a Ponzi scheme. A China Business Journal report also suggests that the company may have lied about details like investment funding and international partners.

Easy Richness has denied those allegations. Via WeChat, the company confirmed that authorities did inspect one of its branches, but it says that inspection was routine. Tech in Asia contacted Easy Richness for comment on this story, but had not heard back as of press time.

Photo credit: Txopi.

Whether or not Easy Richness is actually a Ponzi scheme, more high-profile questions about the integrity of this industry is not what P2P firms needed. Already, growth has slowed to a crawl. According to the China Daily, just four new P2P lending startups were founded last month, down from 12 the previous month. That number has been shrinking for four consecutive months now, and with yields for customers also dropping, an upswing seems unlikely.

As if that wasn’t enough, P2P stat-tracking firm WDZJ data suggest that the number of “problematic” P2P lending platforms in China is on the rise. In other words: Ponzi schemes like Ezubao (and maybe like Easy Richness) might just be the tip of the iceberg.

Most of the startups in this sector are likely to die out.

Of course, not every P2P firm is feeling the heat. As of this writing, US-listed Chinese P2P lender Yirendai’s stock is up several dollars compared to its price during its December launch. That may not be coincidence; Yirendai CEO Yihan Fang told Tech in Asia that the company wanted to list in the US precisely to demonstrate that it wasn’t the kind of shady, non-transparent operation Ezubao turned out to be. So far, it looks like that strategy’s working.

Other P2P lenders, though, aren’t likely to be so insulated from consumer concerns that their money could go up in a puff of smoke if they invest it with P2P firms (since that’s what happened to Ezubao’s customers). A year from now, a few top P2P lenders may still be doing well, but most of the startups in this sector are likely to die out if the industry can’t keep from being mired in charges of fraud.