When China’s peer-to-peer lending bubble burst in the middle of last year, hopes remained that the industry would survive after a period of consolidation.
Those hopes now appear dashed.
China’s online lending crisis reached a new peak this week after Lufax, the country’s largest P2P lending platform, announced it will scale back the business amid tight scrutiny by financial regulators.
The announcement has left the industry shocked and dismayed because Lufax is seen as the Goliath that would never fall. As of the end of June, its outstanding P2P loans stood at Rmb98.4 billion ($14.3 billion), casting shade on many of the country's mid-sized banks.
Lufax, which is short for Shanghai Lujiazui International Financial Asset Exchange, said the decision was made in response to government calls to reduce the scale of the P2P industry and cut the total number of online lenders and borrowers.
It's not the end of Lufax though as the company will continue with its other businesses including wealth management, insurance and mutual fund sales.
Lufax’s retreat sounds the death knell for China’s P2P industry, which was once seen as the crown jewel of the country’s fast-rising fintech sector.
In addition, Lufax’s withdrawal refutes speculation that some P2P platforms have shut down solely due to capital pressures and poor prospects. After all, Lufax raised a whopping $1.3 billion in its series C equity financing late last year and the business is profitable, according to the 2018 annual report of Ping An Insurance, Lufax’s controlling shareholder.
In its stead, the company is pulling out because Beijing is determined to crack down on online lending, which has been at the root of a series of financial problems, including money laundering and frauds.
Such increased levels of scrutiny are also in line with the government’s goal to clean up murky shadow banking activities and rein in non-performing loans. P2P lending is generally seen to be a major source of bad loans because it allows borrowers to access credit even when they are prohibited from borrowing from banks.
China’s P2P sector, which experienced a major collapse in the middle of last year following a wave of defaults that wiped out billions of dollars in online lenders’ savings, has continued to shrink over the last 12 months.
Industry sources estimate that there were about 600 P2P lenders as of the end of June, a sharp decline from about 2,000 in the same month last year. At the peak of the P2P boom in 2016, there were more than 5,000 microlending sites.
SO WHAT NEXT?
Online lending platforms that lived through the turmoil are now striving to survive by switching to the wealth management business.
Many online lending platforms have been cutting back their P2P business while actively seeking partners with banks and insurance firms to develop the wealth management business.
Lufax is likely to follow the same strategy after closing its P2P business. The company had been mulling a $5 billion initial public offering in Hong Kong as early as 2016 but the government crackdown has kept these plans on hold.
For some analysts, though, Lufax’s IPO process may now be back on track now that it has got rid of its P2P business.