M&A still beckons amid Chinese P2P lending boom

China's P2P lending industry seen ripe for consolidation due to tighter rules, even as monthly turnover tops Rmb100 billion for the first time.

Tighter regulation means China's peer-to-peer lending industry is ripe for consolidation even as business continues to grow at an explosive pace.

Turnover on the country's P2P platforms reached a record high of about Rmb115 billion ($18 billion) in September, according to Online Lending House, a domestic portal that tracks the country’s P2P sector. That is 18% higher than in August and more than four times what was recorded a year earlier, it said in a report.

China's developed mega-cities and coastal provinces -- Beijing, Guangdong, Zhejiang, Shanghai, and Jiangsu -- accounted for nearly 90% of total transaction volume last month. Beijing and Guangdong alone did Rmb37 billion and Rmb35 billion of P2P lending each, respectively.

But Xu Hongwei, chief executive officer of Online Lending House, said a further rise in the number of P2P platforms is now unlikely after the Chinese government moved to tighten its grip on internet finance.

“In the past, you could often see fresh college graduates set up P2P firms,” he told FinanceAsia. “Nowadays only those with a strong background in terms of experience, capital, and resources dare enter the industry.”

Ten government organisations, including the People’s Bank of China and the country's banking and securities regulators, jointly unveiled broad new guidelines on internet finance in late July. The new rules require P2P platforms to serve only as intermediaries between borrowers and lenders and ban them from raising funds of their own to lend.

Against that changed backdrop, Xu said a large mass of small P2P firms would soon be weeded out or have to agree to be merged into bigger players as a result of the so-called “Matthew Effect”, a reference to the idea that the rich get richer and the poor get poorer.

“It's easier for big P2P firms to attract venture capitalists and [good-quality] lending projects thanks to their credibility, which would be difficult for smaller ones to achieve. We’ll see more M&A activities in the sector soon,” he said.

In August, Dianrong.com, a large Chinese P2P lender, successfully raised $207 million from a consortium of investors including Standard Chartered and China Fintech Fund.  

Bank partner

According to analysts at HSBC, new guidelines that require P2P firms to seek a bank partner to provide custodian services to protect customer funds may also lead to a reshuffle in the industry.

“Small P2P platforms may find it hard to find bank partners as banks are very cautious of the higher risk profile with P2P lending regarding potential reputational damage. We expect more consolidation to come favouring large players in the P2P space after the draft rules are finalised and implemented,” they said in a note in August.

The follow-on rules with more specific details are expected to be issued by the end of this year.

However, a proper partnership with traditional state-owned banks isn’t an easy task, even for some major P2P players.

“Many banks still don’t know the P2P sector well. They do have concerns about whether to step in or not,” Zhang Weiwei, vice president of Ryhui, a big government-backed P2P firm, told FinanceAsia. “The guidelines don’t require immediate implementation. And both sides need time for [reaching cooperation].”

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