Not only the stock market bubble burst in China last year. It was also the year the mainland’s internet lending bubble burst.
Almost 900 peer-to-peer lending platforms went belly up last year, three times the number in 2014.
Some bankruptcies were due to poor management; some companies folded after the operator took the money and disappeared.
Professor Chen Zhi Wu of Peking University’s School of Economics attributed the fallout to a seriously lagging regulatory framework.
Although the internet makes financial services a lot more accessible and cost-effective, it also provides criminals with an excellent tool to cheat the masses, Chen wrote in an article.
“When there was no internet, these financial gangsters could, at best, cheat people in the neighborhood, but with the internet, they can now reach billions of people living hundreds of miles away,” he wrote.
“Without a proper regulatory framework, internet technology, especially the mobile internet, can easily offer crooks a big break.”
Dealing with nothing more than a webpage, it’s very hard for small investors to discern whether they are putting money into the hands of honest operators, the professor said.
“The internet took away the chance for consumers to distinguish the good providers from the bad,” Chen said.
Mainland regulators were not totally unaware of the risk, but they didn’t take action fast enough because the internet has been hailed as a focus for national development and they didn’t want to spoil the party, Chen said.
Crowdfunding can be another high-risk zone for small investors.
While pooling small sums from a large group of people to support prospective startups is an excellent idea, Chen asked how one can tell if a particular fundraiser will invest the funds as he or she promised, or whether the person is fit to run a startup, or whether the person is a genuine entrepreneur at all.
The high-profile collapse of online retailer Fruitcamp — which raised 300 million yuan (US$45.9 million) from the internet and opened more than 250 online-to-offline stores before it was suddenly shut down in December — is a good example of the high uncertainty involved in crowdfunded projects.
Not all crowdfunded projects are really suitable for the crowd, Chen warned, and that is why rules and regulations are needed.
Local advocates of FinTech have been complaining about how Hong Kong is falling behind the world in this area.
While we should definitely seek new opportunities, we should also learn from the pitfalls China has been going through and plot our moves carefully.
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