China cracks down on Internet finance sector
The People’s Bank of China has announced strict new guidelines for the country’s ballooning peer-to-peer (P2P) and crowdfunding sector, a popular but unregulated part of China’s economy. One reason? Climbing property prices.
Despite an overall slower growth economy in China, we’ve been seeing property prices in China’s wealthiest cities climb to new heights. One of the reasons for this is that more and more Chinese home buyers are using these online lending platforms to obtain mortgage down payments on new homes.
P2P platforms have become a very popular way for Chinese consumers to make big purchases. The nearly 4,000 P2P platforms in China had outstanding loans worth around $90 billion at the end of March. Many of these P2P platforms are funding these loans by attracting customers to invest in short-maturity investment products of all shapes and sizes, promising big returns to Chinese investors who aren’t incredibly sophisticated, or perhaps new members of China’s consumer class who simply don’t have or know about other investment options for their money.
P2P lending and investment platforms may seem new, but we’ve seen this before. They’re a new version of good old-fashioned underground lending, an industry that’s worth hundreds of billions of dollars. In China it’s unregulated; it operates under the radar and can cause problems in the overall economy because the bean counters in Beijing aren’t keeping track of it at all. They aren’t prepared for the greater economic shock if and when this very large gray sector of China’s economy should begin to collapse.
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