On August 6th, 2018 China was forced to shut down the financial district of Beijing in order to prevent individual protests.
Small business owners, entrepreneurs, and other individuals have been devastated by the recent implosion of China’s peer-to-peer lending industry. It’s possible this could have significant ramifications for China’s consumers and their spending, in addition to having a direct impact on those who lost money.
A Chinese Problem
In China, peer-to-peer lending grew much faster than it did in other parts of the world. Similar to payday lending, small loans were available for those who needed them for emergency expenses. On the other side of these loans were business owners and entrepreneurs: people who wanted to see their money grow. The online lending company was just a marketplace: they provided the platform and the technology that was designed to provide these loans.
As with many disruptive technologies, the online lending industry grew too fast. Though the government initially encouraged the development of online lending, regulations had to be established and enforced. In so doing, thousands upon thousands of investors and entrepreneurs may have lost everything that they invested through the platforms.
The appeal of online lending is easy to see. Online lenders don’t need to look for customers: the customers are already looking for them. Customers are able to get money directly wired to them, sometimes in minutes, which makes them less likely to consider the long-term ramifications of borrowing.
Increasing Problems With Regulation
National economies are run on debt. When the economy is solid, consumers spend more, and the money circulates. When the economy is tight, the government often loosens financial restrictions, to ensure that consumers keep spending. This invigorates the economy.
When consumers individually over-extend themselves, however, they head towards financial crisis. Since 2012, individual household debt for China has been steadily growing. Ultimately, this leads to citizens who aren’t able to pay back their debts. Consumer spending becomes restrictive, businesses fail, and lenders are the only ones that profit.
Online lending companies were offering money to those who would traditionally not have been able to get lending. In fact, up to a third of their customers didn’t even have credit cards. All someone needed to borrow from an online lender was a smartphone, making the money more accessible than banks for many.
Meanwhile, because they weren’t well-regulated, online lenders could charge exorbitant interest rates which are analogous to America’s payday lenders. With these high interest rates, it is easy for individuals to get trapped in a debt cycle. They continually need to take out new loans to pay old loans, and they never get ahead of their loans — ultimately paying many times what they originally borrowed in interest.
Government Shutdown Strands Investors
A government crackdown on online lenders, however, had the biggest impact on the investors who were lending money through the platforms. Many investors have been left adrift with no idea as to what happened to their money, whether it’s possible to get it back, or whether it’s gone forever. Some of these investors had hundreds of thousands of dollars on these platforms, which could have been funding thousands of individual, small loans.
Investors are attempting to get the attention of then national authorities, but they have responded by shutting down the protests. Few are optimistic about the fact that they may be able to get their money back, though they are still trying. From the government standpoint, it appears that the state is urging investors to be more cautious and skeptical about their investments, and putting the onus upon the investors to investigate regulations and seek out more legitimate investment scenarios.
China’s online lending crisis is not the first of its type, nor is it likely to be its last. Online lending has become accessible for the majority of the world, and when not properly regulated, it can become a new type of predatory loan sharking. Online lending platforms need to be well-regulated and controlled if they are to be ultimately good for the overall economy, and online lending platforms that are “too good to be true” are likely to be skirting past regulations in some form or another.
In America, The Lending Club is arguably the most popular P2P lending platform, and it hasn’t evaded scrutiny. Lending platforms empower investors to invest large amounts of money in financial instruments that they may not have a thorough understanding of, and though this can represent great profit potential, it can also lead to staggering loss.
Regards,
Ethan Warrick
Editor
Wealth Authority
