Greed, illegal fund raising, Ponzi schemes, promises of juicy high returns in China’s US$30 billion failed Peer-to-Peer (P2P) Lending Money Game

The collapse of China’s peer-to-peer platforms, once touted as a model to reshape the nation’s financial landscape, has left millions of victims in financial ruin and despair.

Like most Ponzi schemes, tales of greed have emerged as the common thread in China’s explosive growth in internet-based lending. The business coexists alongside other under-regulated wealth products that lurk in the shadow of its banking ecosystem.

About 6,000 P2P lending companies have defaulted on payments, absconded with cash or quit operations as of the end of September this year, according to industry data provider Wangdaizhijia. In total, the equivalent of US$30.6 billion from 2.7 million customers may have been trapped in the failed platforms.

P2P platforms mushroomed at the height of financial markets deregulation from 2012. They collect funds from private investors with promises of high returns, and lend them to individuals and small companies that typically have trouble borrowing from traditional banks.

However, thousands of P2P platform operators illegally raised funds from depositors before lending them to companies, such as property developers, offering investors lofty interest rates of at least eight per cent a year – or five times more than banks pay on deposits.

Most of them, however, are disappointed as the state would not intervened to bail out small investors.

The latest clampdown by authorities may sound the death-knell for the industry. In the case of Xinming Finance, local prosecutors have sued several individuals in a Shanghai court for illegal fundraising. It brings little consolation for Bao and other victims.

“We were greedy and attracted by the high returns,” said Bao, the retiree in Shanghai. “But we had the belief that it wouldn’t be wrong to follow the government’s directions.”

Source: SCMP