On this episode of China Uncensored,
it turns out that lending money
to strangers on the internet
can be kind of risky.
Hi, welcome back to China Uncensored.
I’m your host, Chris Chappell.
It’s scarier than Jurassic Park.
More terrifying than Jaws.
And way more...serious than The MEG.
It’s the peer-to-peer loan crisis in China.
And it’s worse than Jason Statham
trying to stretch his acting range.
P2P lending is also called crowdlending.
It’s one part of China’s shadow banking industry—
a kind of parallel dimension of debt financing
that conjures up images of back alley loan sharks.
Shadow banking is all the lending and borrowing
that’s done outside the highly regulated banking industry.
And in China, shadow banking is big business.
It includes includes everything
from high-risk exotic investment products,
to pawnshop and loan shark operations,
to online peer-to-peer loans.
Shadow banking has been crucial to China’s economy
because it provides much-needed loans to small businesses
and individuals that might not qualify for regular bank loans.
Local governments have even used shadow banking loans
to make up shortfalls.
Shadow banking in China is a 10 trillion dollar a year industry.
This slice—about 9%—is the crowdlending sector.
The P2P lending may seem like a small slice,
but there’s more P2P lending in China
than everywhere else in the world combined.
It’s got 50 million registered users,
and outstanding loans of around $200 billion dollars.
P2P lending is a bit like like Tinder.
But instead of going on a date with a stranger,
you enter into a financial partnership with a stranger.
In both cases,
if the person has face tattoos,
swipe left.
Okay, seriously P2P lending is less like Tinder
and more like Kickstarter.
Only instead of funding a company
and getting an underwater drone,
or a high-tech watergun, or a....
giant Lionel Richie head...ok,
instead of a product,
you fund a company and earn interest from your loan
after a certain period of time.
By cutting out the bank as a middleman,
crowdlending platforms promise high returns to lenders,
and cheaper loans to borrowers.
Some platforms promised as much as a 12% return,
which is way higher than you could get from anywhere else.
Win win, it would seem.
Except that these platforms have spread like wildfire
pretty much without any regulatory oversight,
and a lot of times the loans are risky.
Like, you might think you’re funding the underwater drone,
when it turns out you’ve actually funded
the giant Lionel Richie head.
And there’s no way to pull your money out.
And a lot of times, lenders don’t get paid back.
Also, the lack of oversight means that
even P2P companies themselves
can cheat investors over a long period of time.
For example eZuBao.
It was once the golden child of P2P lending in China.
But it was shut down in 2016 after cheating investors
out of $7.6 billion dollars in an elaborate Ponzi scheme.
How elaborate?
Well, according to the New York Times,
eZuBao duped about a million investors
by offering fake investment products.
And to hide their trail,
the bosses buried 1200 documents
in 80 bags 20 feet underground that took police
a whole day to dig up with two excavators.
That’s crazy!
Did no one tell them about paper shredders?
Or a bonfire?
And it goes way beyond just peer-to-peer lending.
The entire shadow banking sector in China
has been gripped by a regulatory shakedown
in order to reduce leverage, curb crazy levels of risk,
and hopefully prevent a financial meltdown.
Since regulators took P2P lending into their crosshairs,
these platforms have started dropping like flies.
According to the South China Morning Post,
the total number of P2P lending platforms
that have failed is over 4 and a half thousand,
with more than 200 in July alone.
Yes, there are more than four thousand lending companies
that have failed,
taking people’s money down with them.
The head of the Shenzhen Internet Financial Association
warns that “The industry might enter a great recession.”
Everybody’s on edge, he says, as some companies shut down
because of bad loans, fraud, or asset freezes by inspectors.
A total of 165 lending platforms
stopped allowing investor withdrawals in July,
locking up tens of billions of dollars in capital.
On top of that, hundreds of P2P lending platform owners
have simply run away with investors’ money!
So obviously, a lot of people are upset.
They want the government to bail them out.
Or to hold the companies accountable.
But in the government’s view, it’s the investors’ own fault.
People knew it was risky, and invested their money anyway.
Besides, government bailouts are only for
rich corporations that are too big to fail.
So a lot of angry people decided to undermine
China’s harmonious society by traveling to Beijing
to petition the appropriate government office.
Don’t see any protesters?
That’s because no protest took place.
“Last Monday,
many wanted to demand a P2P bailout from the government,
and organized themselves online.
However, any challenge to stability is sensitive in China
and those who managed to make it to the protest area were detained.
An investor told Reuters this video shows they were forced
onto buses and carted away to a holding center.”
Some petitioners didn’t even make it all the way to Beijing.
According to Reuters, many would-be protesters were removed
from Beijing-bound trains ahead of the protests,
forced to give fingerprints and even blood samples.
Turns out it’s not just banks
that are the bloodsuckers in this story.
Now to be fair,
Chinese authorities didn’t only crack down on
investors who lost their life savings.
They also cracked down on people who borrowed money,
and had trouble paying back their P2P loans.
Authorities put them on a social credit rating blacklist.
It’s just one of the 10 delightful new measures
China’s regulators have come up with to minimize risk.
And to make sure that no one goes unpunished.
Others measures include “strictly banning” local authorities
from allowing any new P2P lending platforms to be set up,
and setting up so-called “communication windows”
where people who’ve lost money can vent their grievances
outside the public eye,
where someone no power to help them,
can pretend to listen.
Now it’s good that the Chinese government
is finally trying to regulate this P2P lending industry.
But as for the individual investors
who have already lost their life savings?
They now understand just how
the Chinese Communist Party maintains stability:
There’s a serious financial problem that threatens
the livelihoods of millions of people.
But instead of allowing protests,
they figure out a way to keep protesters quiet,
and sweep the whole thing under the rug.
Or under a giant Lionel Richie head.
So what do you think China should bail out P2P lenders?
And what do you think about China
clamping down on protesters?
And what’s the weirdest kickstarter you’ve ever funded?
Leave your comments below.
And before we go,
it’s time for a question from one of our fans
who supports China Uncensored on Patreon.
James Kelton asks:
“Is there anything happening in China at the moment
that isn't a prelude to the Apocalypse?
It all seems rather gloomy of late...”
Nope!
It’s all gloom and doom.
Sorry, James.
I’m just kidding.
There are good things happening in China.
For example, in northern China,
there’s a project underway
to turn desert into arable farmland.
Although, the part they leave out is
how seven decades of bad environmental policy
resulted in massive desertification.
So yes there are good things.
But I generally don’t tell you
about them on China Uncensored,
since Chinese state-run media is doing
a perfectly good job of that.
China Uncensored is here to tell you about the things
state-run media keeps censored.
And those are not the positive things.
Thanks for your question, James.
And for everyone else watching,
China Uncensored relies on viewer support.
So click the link below to visit us
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and I might answer your question next.
Once again, I’m Chris Chappell.
Thanks for watching China Uncensored.
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