China's Internet finance thrives as fraud fades

Updated 2017-04-20 10:30:51

Wang Pengfei, vice president of a leading Internet finance company, has seen the industry grow in China at a galloping pace, along with some shady practices.

After working at a state-owned lender for a decade, Wang joined Weidai, an Internet finance company whose name means "micro-loan," in 2014 when the industry was flourishing.


The industry's burgeoning development came as no accident to Wang and other market observers.

China has four large state-owned banks, and state-owned enterprises generally have easier access to financing. Many small companies are troubled by the financing bottleneck, creating pent-up demand.

Meanwhile, working-class families struggle to figure out where to invest their savings to seek higher returns, and many of them move money online. The country, home to the world's biggest online population, also has a number of groups, such as college students, who are underserved by banks.

China has not established a sound social credit system, and credit cards are not as popular as in some advanced economies. Online payment has instead emerged as a well-received alternative to cash. Crowd funding has picked up momentum as a wave of entrepreneurship has hit the country.

Development of Internet finance has helped broaden the financial reach, improve efficiency of financial services, give Chinese more investment options, and help some small businesses get badly needed loans, but the boom has its costs.

The first peer-to-peer (P2P) lending platform was launched in 2007, and exploded in popularity in China, with the number of such platforms surging 18 times between 2012 and 2015 and the combined transaction volume jumping about 40 times over the period, according to data from the State Information Center.

P2P lending platforms helped link clients seeking better yields with borrowers starved for capital, but a report from leading industry information provider painted a grim picture. By March 2017, 3,607 Chinese P2P lending platforms had run into trouble or been forced to close, with only 2,281 platforms in normal operation.

With a relatively low barrier to entry in the industry, some high-profile fraud cases emerged and grabbed headlines, such as P2P lending platform Ezubao that cheated investors out of nearly 60 billion yuan (8.7 billion U.S. dollars) through fake investment projects.

Some bogus lending platforms diverted client funds for other purposes, while online Chinese loan sharks illegally demanded nude photos as a form of collateral from cash-strapped female college students. These cases have triggered the concerns of regulators and a year-long industry correction.

On top of P2P lending, Internet finance also covers business such as third-party online payment, crowd funding, and other financial services.

"In tandem with the rapid growth, China's Internet finance industry is afflicted with Ponzi schemes and some companies deviate from their main business to seek hefty profits," said Li Bo, a researcher with the People's Bank of China (PBOC), the central bank.

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