Chinese takeaway - The experience of China’s peer-to-peer lending sector offers food for thought
In articles such as Peer review and Differing accounts, The Value Perspective has stressed how important it is for anyone considering peer-to-peer lending to be entirely comfortable with the balance of risk and reward on offer. Some statistics on the practice that have recently emerged from China have done little to change our views.
None of what follows is to suggest the UK experience will be anything like China’s but it is nevertheless interesting to see what is happening in a country where the peer-to-peer lending (p2p) market has grown from $30m (£18.3m) in 2009 to $940m in 2012 and is on track to hit $7.8bn by 2015, according to research published last year by consultancy firm Celent.
Mind you, the future for peer-to-peer lending in China might be somewhat less rosy should another trend continue. According to online lending house, an internet portal that tracks the sector, 58 out of China’s almost 1,000 peer-to-peer lending companies went bust in the final three months of 2013 while a number of others are already showing signs of suffering this year.
Online lending house’s Chief Executive Xu Hongwei went so far as to suggest to the Financial Times in this article that 80% or 90% of China’s peer-to-peer lenders might go bust, citing as reasons the intense competition in the industry, the liquidity squeeze at the end of last year and a loss of faith by investors.
The founder of one Chinese peer-to-peer lender painted an equally bleak picture with Pandai’s Roger Ying telling the FT: “A lot of P2Ps have blindly copied each other and they don’t have a business plan that is robust enough to react to market changes. They’ve just focused on sales, scale and bragging to each other.”
In other words, they realised one of The Value Perspective’s biggest concerns about the peer-to-peer sector – poorly aligned incentives. Since peer-to-peer lending businesses make money by charging a percentage of the money they invest, they are more incentivised to grow their overall assets under management than they are to investigate thoroughly the creditworthiness of potential borrowers.
A successful peer-to-peer lending sector – in China, the UK or wherever – needs a better alignment of interests between companies and their investors. Meanwhile a newer concern – a more immediate issue in China perhaps but not impossible to imagine happening in the UK – is the way peer-to-peer lending might be seen as filling a gap in the financial system by helping small businesses find funding.
The thing is, consumers might borrow from a lender to buy a car, say, paying down their debt time. Companies, however, will often use debt to help finance the purchase of much longer-term assets – for example, a factory over a period of 30 years – and then roll over the debt in five-year chunks.
Say a company took the peer-to-peer lender route and the sector grew at the sort of rate Celent predicts; a new risk raises its head. If at some point there was any sort of loss of faith – any sort of ‘run’ – on the peer-to-peer sector, the next time the company needed to refinance its debt, it might be unable to find any lenders and so be forced back to a smaller – less accommodating – ‘traditional’ banking industry.
Fund Manager, Equity Value
I joined Schroders European equity research team in 2007 as an analyst specialising in automobiles. After two years I added the insurance sector to my coverage. In early 2010 I moved into a fund management role, and then took over management of two offshore funds investing in European and Global companies seeking to offer income and capital growth.
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