How peer-to-peer lending turned middle-class Chinese dreamers into angry protesters

All gone.
All gone.
Image: Reuters
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One would-be protester skulked on the streets around the Westin Hotel in Beijing’s financial district until 3 am, heading back only when police had finished their searches. Another, Alex Li, carpooled part of the way from northern Harbin province to avoid police surveillance on public transport.

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 financial district on Monday (August 6).  It was the latest flare-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 financial risk to China’s economy, financial 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 offices, 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—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 offices 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 finally 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 financial tools by high-ranking Chinese officials and big tech firms. 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 finance 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.

A lender on the PaiPaiDai platform works from his home in Shanghai in 2011.
A lender on the PaiPaiDai platform works from his home in Shanghai in 2011.
Image: Reuters/Carlos Barria

The number of P2P firms 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 profits of up to 60% (link in Chinese) before the founder fled and the platform failed to pay back (link in Chinese) more than 200 million yuan ($29 billion) in June. That month, Guo Shuqing, chairman of China Banking and Insurance Regulatory Commission, issued a stark warning (paywall): “You should question when the rate is above 6%, [a rate above] 8% is a dangerous signal, and you can prepare to lose all deposits if 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 and advisory firm, who closely tracks China’s financial framework. “Because of the Great Firewall there is just less information—that’s not a judgement, that’s a fact.”

Caught up in China’s risk 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, compared with 217 such cases in all of 2017, according to industry monitoring service site Wangdaizhijia (Online Lending House).

A booth for Ezubao, once China’s biggest P2P lending platform, 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.
A booth for Ezubao, once China’s biggest P2P lending platform, 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.
Image: Reuters

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 financial risk and speculation, and regulate the shadow banking sector. These efforts have included curbing capital flows by Chinese business groups overseas into irrational investments, banning cryptocurrency exchanges and coin offerings, and trying to cut the debt of inefficient 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 financial 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 firm 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, firms 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 firms 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 suspended its service in July, a flood of citizens flocked to (paywall) the company’s Shenzhen office 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 manage to hold their protest. WeChat and other chat app groups formed by investors were identified and blocked, and participants were barred from purchasing air and train tickets. Yet accounts from multiple news reports and social media suggest thousands may have managed to make it to Beijing.

Ahead of the planned protest, a Twitter account whose name means “Financial Refugee” posted a 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 official guidance has led to financial turmoil for tens of millions of families.”