Tuandai.com, one of China’s major peer-to-peer (P2P) lending platforms, collapsed late last month.
Founded in 2011, Tuandai was ranked China’s 14th largest P2P lending platforms and had an outstanding loan balance of 14.5 billion yuan.
The company had done three rounds of fund-raising and raised a total of 675 million yuan before it went belly up.
P2P itself is not a bad thing, since it connects those with surplus funds with cash-strapped individuals or small businesses.
The business allows individuals to lend to each other, where lenders can earn high interest rates —higher than those offered by banks — and borrowers get the financing they need, which they might not secure through traditional channels such as banks.
Nobel Laureate and social entrepreneur Muhammad Yunus is known as a pioneer of such microcredit concept.
Yunus founded Grameen Bank in Bangladesh, which acts as a platform to help farmers lend and borrow from one another, thus enabling local villagers to get the money for seeds and essential farming tools, and overcome poverty eventually.
The advent of internet has taken P2P lending to the next level. But the boom comes at a price. With such platforms mushrooming across China, competition has become cutthroat.
Responding to increasing rivalry, some P2P companies began offering higher and higher interest rates to lure lenders, while getting increasingly lax in approving loans in order to win businesses.
Tuandai, for instance, promised more than 10 percent annualized yield to lenders on its platform.
As defaults rose, some players were believed to have paid the lenders on their platform with their own money in order to keep the operation going. When money ran tight, some even set up shell companies to pretend as borrowers on the platform to raise funds, essentially developing into some sort of Ponzi scheme.
Numerous Chinese P2P platforms collapsed last year, mainly due to overly aggressive business practices.
Aware of the problems, Chinese authorities had, since 2017, prohibited P2P lending platforms from using their own capital to repay investors.
The ban is said to have accelerated the collapse of those who were deeply mired in the liquidity crunch.
Anyone who wants to invest in P2P must bear in mind that exceedingly attractive interest rates typically come with much higher risk. There is no free lunch.
This article appeared in the Hong Kong Economic Journal on April 8
Translation by Julie Zhu
[Chinese version 中文版]
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