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P2P lenders react to China's $7.6B Ponzi scandal
The biggest victims of the RMB50 billion ($7.6 billion) Ponzi scam recently uncovered in China are, of course, the 900,000 investors who entrusted their money to peer-to-peer (P2P) lending platform Ezubao. But beyond that, many other P2P lenders will also suffer from the scandal.
The full extent of the scam was only just uncovered this week – executives from Ezubao’s parent company, Yuncheng Group, are now calling it “a complete Ponzi scheme” — but trouble has been brewing for some time.
The short-term impact will be that the fast-growing and loosely regulated P2P lending space will be the target of a massive crackdown. Alongside tighter regulations – and perhaps even asset freezes — P2P platforms will likely face more compliance costs and a tougher fundraising environment as venture capitalists become more hesitant about investing in the space. How are P2P startups reacting?
Firstly, many are looking to distinguish themselves from the P2P platforms – like Ezubao – that have got into trouble. Horan Fu, associate director with internet lender Dynamic Asset Management, notes that many platforms still hold client deposits, effectively creating pooled investment funds. This is something the China Banking Regulatory Commission (CBRC) has been trying to stamp out in the P2P space.
By contrast, there are platforms like Dynamic – which operates in Shenzhen and Hong Kong – that work by using third-party custodians, like banks, to act as escrow agents. The CBRC is trying to make this a requirement for all P2P platforms. For this reason, people like Fu welcome tighter regulations. He told NexChange:
By going after one of the biggest platforms in China, the authorities are sending a message to the market, and to P2P lenders, that they will have to adapt to a new way of doing business and protect client assets. The Chinese government knows that if the regulation cannot be enforced, they face a big systemic risk. So, this is a good move by the government.
Mukesh Bubna, CEO of Hong Kong-based P2P lender Monexo, predicts that 50-60% of the platforms around today will disappear as soon as tighter regulations are enforced. But he is also optimistic, adding that the long-term benefit will be a boost in consumer adoption and faster growth for those platforms left standing.
But regulation is not necessarily a panacea for all P2P’s problems, Bubna says that it’s equally important that there is transparency in the industry so that regulation is effective. He told NexChange:
Management teams without integrity have found ways to create similar Ponzi schemes for their personal benefit even in regulated industries. This big blow to China’s P2P industry underscores the need for management integrity as well as faster progress on regulations.