China’s peer-to-peer (P2P) lending platforms are at a critical moment after growing rapidly in the last two or three years.
The mainland’s financial institutions can’t fully satisfy the financing needs of micro and small companies and individual consumers.
That has led to explosive growth in the non-banking financial sector.
One group of P2P platforms — including Fenqile, Juzilicai, PPDai and Credit Ease – focuses on consumer financing, and another — including Jimu Box and Yooli – mainly targets companies.
Last year, the nation’s online P2P market reached 140 billion yuan. The sector has been taking market share from the 5-trillion-yuan private lending and the 32-trillion-yuan shadow banking markets.
And it has also begun to eat into the nation’s 100-trillion-yuan banking sector.
Robust investment demand and scarcity of investment options are the main drivers for P2P lending. The high-growth momentum is likely to sustain for next three to five years.
In the US, the P2P industry has a complete eco-system. But that is not the case in China.
Given the situation, the first batch of Chinese P2P companies would act more like financial institutions. Hence, their valuations should also be similar to that of financial institutions rather than financing platforms.
A number of internet financing platforms have launched, or have already completed, fund-raising efforts. U51, Feidee, JFZ made the move in the first half of the year, while Fenqile, Qufenqi, Xueqiu, Jimu Box intend to follow suit in the coming months.
Many venture capital firms and large corporates have invested in nearly 30 P2P platforms. The investors include names such as IDG, Sequoia Capital, Lenovo and Xiaomi.
Meanwhile, some Chinese banks and state-owned enterprises have also bought into existing P2P platforms or set up their own subsidiaries. A number of private-equity funds have also made big investment in the sector this year. We’ve seen some deals worth over US$100 million.
We favor companies that have deep understanding of their customers, and extensive resources and experience. Also, the firms must have proper risk management systems while having tight control on assets.
In China, up to 90 percent of the financial market is in the hands of banks. And massive assets will be shifted off balance sheet in the next five years. The internet finance companies are riding on the trend.
There are many people in China who have opted not to put their money in banks. Meanwhile, the number of issued credit cards has only reached 400 million.
Against this backdrop, internet finance has huge potential.
There are three key things to note for those seeking to capture the opportunities in China’s P2P sector.
First, the nation’s traditional financing institutions have failed to address the demand, creating room for internet finance players.
Second, internet financial companies can leverage on the cost advantage and offer value for customers.
Third, as companies get hold of vast big data, such as e-commerce transaction data, it could be used to assist banks in loan issuance.
This article was published in the Hong Kong Economic Journal on July 15.
It was contributed by Fan Bao, chairman and chief executive of China Renaissance Partners.
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