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FINANCIAL REFUGEES

How peer-to-peer lending turned

middle-class Chinese dreamers
into angry protesters
By Ziyi Tang, Tripti Lahiri & Echo Huang • August 11, 2018

REUTERS
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Sign up for the Quartz One would-be protester skulked on the streets around the Westin
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Hotel in Beijing’s nancial district until 3 am, heading back only
Enter your email when police had nished their searches. Another, Alex Li, carpooled
part of the way from northern Harbin province to avoid police
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surveillance on public transport.
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The two were among thousands of middle-class Chinese from all over
the country who were trying to make it past China’s high-tech
surveillance to demonstrate in Beijing’s nancial district on Monday
(August 6).  It was the latest are-up of resentment among Chinese
people aspiring to live a better life and being thwarted.

In recent years, many in China’s middle classes poured their savings

into peer-to-peer lending platforms, known as P2P for short, drawn in
by promises of high returns. But amid a larger effort to curb nancial
risk to China’s economy, nancial regulators tightened rules for these
platforms, leading many of them to collapse without returning
investor money. In Li’s case, the main stakeholders of Yonglibao,
which he had put his money into, suddenly disappeared in mid-
July (link in Chinese), he told the South China Morning Post. By the
time its founders abandoned its of ces, the platform had amassed a
transaction volume of 7.6 billion yuan ($1.1 billion). The other
protester told Quartz he had lost the equivalent of $50,000 on a
platform called iqianjin.com—its name is Love Money, though it can
also be understood as “Get Ahead” or “Money Coming.”

Both hoped a protest in Beijing would compel the government to help

people recover their money from the dozens of P2P platforms that
stopped allowing fund withdrawals last month. Instead, they were
foiled by hundreds of uniformed police who locked down the area,
patrolling corners near the of ces of the central bank and securities
regulators, and checking identity cards. More than 120 buses were
brought to the area to take the stealth protesters away, according to a
reporter with AFP.

“P2P nally turned from ‘peer-to-peer’ to ‘police-to-people,'” wrote

one commenter Twitter.

Quick money guaranteed by the

government?
The platforms might look like scams now, but they were once
promoted as innovative nancial tools by high-ranking Chinese
of cials and big tech rms. Persuaded, many people, including single
mothers and young people trying to raise the money to buy an
apartment, poured their money into them.

Back in 2015, China’s premier Li Keqiang and former governor of

China’s central bank Zhou Xiaochuan both publicly endorsed (link in
Chinese) P2P as a way to develop internet nance and support small-
to-medium businesses. Compared to the traditional banking system,
P2P has a lower investment threshold for savers, while offering
borrowers without much credit history the chance to raise funds more
easily. The public support for the sector, coupled with word-of-mouth
referrals, drew in millions of small lenders and helped make China
the biggest P2P lending market in the world, with 1.2 trillion yuan
($175 billion) in loans outstanding as of 2017 (paywall).

That was the year two major players in the sector IPO’d—including
one of its oldest, PPDai, founded in 2007.
REUTERS/CARLOS BARRIA

A lender on the PaiPaiDai pla form works from his home in Shanghai in 2011.

The number of P2P rms went from 10 in 2010, to more than 3,000 in
2015, according to a June research report from Singapore-based DBS
Bank. But as more and more players got into the market, some began
promising interest rates much higher than competitors. Compared
with an interest rate of less than 2% in Chinese banks, many P2P
platforms promised a return of 10% (link in Chinese). They also began
promising investors better returns if they got more people in their
network to invest in the P2P platforms.

One P2P platform went as far as promising pro ts of up to 60% (link

in Chinese) before the founder ed and the platform failed to pay
back (link in Chinese) more than 200 million yuan
($29 billion) in June. That month, Guo Shuqing,
“You should question chairman of China Banking and Insurance
Regulatory Commission, issued a stark warning
when the rate is (paywall): “You should question when the rate is
above 6%… prepare above 6%, [a rate above] 8% is a dangerous signal,

to lose all deposits if and you can prepare to lose all deposits if it’s more
than 10%.”
it’s more than 10%.”
The truth is, this was risky lending—according to
the DBS report, the typical P2P borrower is likely to
be between the ages of 20 and 39, earning between $300 to $1200 a
month, and with little credit history. Lack of transparency regarding
how the platforms were using pooled money for loans made it hard
for investors to judge what was happening—and the controlled nature
of China’s internet may also have played a role.

“The average Chinese citizen is operating without complete

information and that fuels a lot of what we see as very risky
behavior,” said Jehan Chu, founder of Hong Kong-
based Kenetic Capital, a cryptocurrency investment
“Because of the Great and advisory rm, who closely tracks China’s
nancial framework. “Because of the Great Firewall
Firewall there is just there is just less information—that’s not a
less information— judgement, that’s a fact.”

that’s not just a

judgement, that’s a Caught up in China’s risk
fact.” clean-up
Zhang Xue, a 47-year-old single mother who
invested in P2P platforms with the money her
husband left after he died of a heart attack, told a domestic news site
(link in Chinese) that she had lost all her life savings of 3.8 million
yuan ($550,000). “In more than 40 years, I have never regretted and
blamed myself like today. I feel that by coveting high-interest rates
I’ve pushed my child into a dead end,” said Zhang, who now can’t
afford her child’s tuition fees.

She is one of 400 victims of the collapse of Touzhijia, a P2P platform

that went bankrupt last month with 26 million yuan ($3 million) (link
in Chinese) in debts. Touzhijia is one of 221 P2P
platforms (link in Chinese) that shuttered in July,
“In more than 40 compared with 217 such cases in all of 2017,
according to industry monitoring service site
years, I have never Wangdaizhijia (Online Lending House).
regre ted and blamed
myself like today.”
REUTERS

A booth for Ezubao, once China’s biggest P P lending pla form, at a trade fair in China. In 2016, authorities
shut it down for being a Ponzi scheme. It took in $7.6 billion from investors.

The uptick comes after China began tightening rules for peer-to-peer
lenders in August 2016 as part of an overall effort to reduce systemic
nancial risk and speculation, and regulate the shadow banking
sector. These efforts have included curbing capital ows by Chinese
business groups overseas into irrational investments, banning
cryptocurrency exchanges and coin offerings, and trying to cut the
debt of inef cient state-run organizations. Stricter regulation was
also a response to previous cases of investor fraud—for example, the
case of Ezubao, a P2P site that was shut down by authorities in early
2016. Nor is the tightening over yet.

“The Chinese government since July has launched a series of new

nancial regulations, and will likely release more (including further
regulations for the P2P lending industry) in the coming weeks,”
Yuanxin Liao, a Shanghai-based associate analyst at consulting rm
Control Risks, told Quartz via email. “The concerns of the protestors,
as well as the many investors exposed to the same risks, are very
likely a key consideration in the policy drafting.”

To pass a review initiated by Beijing, rms had to show they had

appointed a custodian bank to oversee funds, and that they were
making full disclosures on fund use, among other things. The
deadline to pass the review was June this year, with more and more
rms closing as the deadline approached. As news of shutdowns
spread, panicked investors began withdrawing their deposits, setting
off a vicious cycle.  For instance, when lending platform Qian88.com
suspended its service in July, a ood of citizens ocked to (paywall)
the company’s Shenzhen of ce to withdraw their money, and police
had to be called in to maintain order, according to Bloomberg. Several
platforms, including Touzhijia (link in Chinese), are under police
investigation.  The DBS report said the shakeout could see the
number of P2P platforms reduce from around 1,800 at present to 300.

In desperation, people from all parts of China began surreptitiously

organizing to make it to Beijing. Protesters in China are taking
enormous risks, such as facing detention, and
constant scrutiny in the future—even if they don’t
“The P P online manage to hold their protest. WeChat and other
chat app groups formed by investors were identi ed
lending pla form and blocked, and participants were barred from
originated in Europe purchasing air and train tickets. Yet accounts from

and America, why is it multiple news reports and social media suggest
thousands may have managed to make it to Beijing.
only in China that so
many of them turn Ahead of the planned protest, a Twitter account
whose name means “Financial Refugee” posted a
bad?” letter (pdf, link in Chinese) on behalf of the troubled
investors, saying protest was their only recourse
after their complaints had gone unanswered by
authorities.

“We can’t help but ask, the P2P online lending platform originated in
Europe and America, why is it only in China that so many of them
turn bad?” said the letter. “Ironically, a policy backed by of cial
guidance has led to nancial turmoil for tens of millions of families.”

h tps://qz.com/1351198/

china, beijing, banking, qzasia, investing

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