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Nikolaj Potanin,

A deep dive into China’s peer-to-peer lending space with Spencer Li

By Ryan Weeks on 12th January 2016

The growth of peer-to-peer lending in China has astounded and confounded Western observers. In all likelihood, more money has passed through China’s peer-to-peer sector than has passed through the rest of the world’s peer-to-peer lending markets combined. Nowhere else in the world will you find a peer-to-peer lending “decacorn” – Silicon Valley speak for a private tech startup with a valuation upwards of $10bn. For context, Lending Club currently carries a market cap of $3.6bn. But the flipside is that this is a market crippled by opacity. It’s become commonplace to read about the latest hundred failed or fraudulent peer-to-peer lenders in China. Tighter regulation now appears to be rounding into form, but absolute clarity has yet to materialise.


To have even a sliver of hope of decoding and debunking the many newsbytes that blow in from the Orient, one needs to parlais with the people on the ground. That’s where Spencer Li, VP of Product at Fincera, comes in. Fincera is a Chinese platform focused on supplying online financing solutions to the heavy trucking industry. Spencer is a practiced industry commentator – recently authoring an in-depth analysis of Yirendai’s now-completed US IPO. We caught up with Spencer to get a better handle on the Chinese market, covering everything from regulatory oversight, to capital raises.


The cultural significance of the peer-to-peer lending phenomenon in China seemed like a sensible place to start. It’s often said that the concept of peer-to-peer lending far predates the advent of the first online intermediary in China. But what exactly are commentators getting at here? Spencer offered his take:


“It’s very common in China to borrow and lend from friends and relatives or even neighbors within a community. I guess it’s part of the collectivistic culture that has developed over thousands of years in China’s predominantly agricultural communities. Rural villages are small and everyone knows each other, so if anyone falls on hard times, others step up to help out.”


Spencer went on to allude to a kind of societal pressure to lend and to help others. Those that refuse to yield risk being labeled as “xiao qi” (“stingy”), and thus losing face.


The peer-to-peer lending market in China has suffered from a dearth of transparency to date – both in terms of volume data and in terms of product offering and processes. Said Spencer:


“The lack of transparency in lending volume is driven by platforms wanting to exaggerate their volume so that they can be viewed as one of the leading platforms to attract more lenders and investors.”


The Fincera man believes that the few industry data sources that are present (the likes of wangdaizhijia and 01caijing) have in the past been pressured by the major platforms into inflating volume data. Li further asserts that the clouding of processes within Chinese peer-to-peer lending has come about primarily due to the desire on the part of less-than-reputable platforms to mask improper or illegal operations, or to cover over deficient credit processes. Transparency is unlikely to materialise within the sector until the regulator wills it to. Note though the recent draft regulations from the People’s Bank of China, which called among other things for an “Improvement in the provision of coordination and monitoring of statistical data.”


Given the widespread lack of transparency, it’s hardly surprising that understanding the sheer size of the peer-to-peer market in China is no simple task. Li’s take?


“Based on what I see in the media, just over 3,000 is the number of platforms that have launched in China and currently just under 2,000 are still in operation. Which implies that over 1,000 platforms have failed or were frauds. We still have scores of new entrants and exits of failed platforms every month, but the figure seems to have held steady at under 2,000 for the past few months.”


It’s nigh on impossible to make an accurate estimation of cumulative volume, but Spencer suggests that reports that land on a number upwards of $100 billion seem reasonable.


As has been touched upon, Fincera operates a number of lending platforms that service the heavy trucking industry in China – including a peer-to-peer lending outfit by the name of CeraVest. Of course, in a market of China’s size, operating as a “niche” player is not as limiting one might imagine.


“Many niche markets in China are gigantic markets by themselves,” said Li. “Leading operators within these markets are best positioned to establish platforms that serve their specific industry”


The Chinese peer-to-peer space has seen some truly gargantuan equity rounds of late. None larger than Lufax’s recent $900m fundraise, which was reported to have carried an $18.5 billion valuation. IPO rumours and 8 or even 9 figure fundraises are becoming almost routine in China's peer-to-peer sector. Li sees this merely as the continuation of a global trend, and he’s quite right that the equity money has been flowing in most of the world’s major peer-to-peer markets. SoFi, for example, recently raised $1bn from SoftBank. But Spencer made an intriguing point about the driving logic behind some of the investments that have been made in China:


“For some of the more established platforms, depending on the investor’s background, the investment may be for strategic reasons rather than financial. For example, Alibaba and Tecent invested in the ride hailing apps Didi and Kuaidi in order to drive payment volumes for their Alipay and Tenpay payment platforms.”


On Yirendai’s recent $75m IPO on the New York Stock Exchange, Li simply raised the suggestion that the listing was likely taken to the US because regulatory hurdles in China would have rendered an IPO much more difficult.


On, then, to the thorny issue of regulation in the Chinese P2P space. Regulatory proposals were issued by the People’s Bank of China in July last year, and subsequently by the China Banking Regulatory Commission in December. It’s clear that the Chinese government is beginning to move on multiple fronts to bring the peer-to-peer market into line. Li doesn’t anticipate severe consolidation in the short term, given the 18 month transitional period that has been outlined in the draft rules. It’s likely that consolidation will be driven by the market, rather than by policy. On the nature of the rules themselves, Li offered the following wisdom:


“The government doesn’t really want to regulate this space but they are forced to, given the cases of fraud and illegal activities. The CBRC draft rules are very hands-off, vague, and open to interpretation so I wouldn’t say the industry is “formally” regulated. CBRC has designated the specific regulatory tasks to the local regulators and I think it’ll be a while before those guys can figure out how to regulate the space effectively. Local regulators will definitely all follow the final CBRC rules, but they will differ on how they interpret the rules.”


Finally, though international expansion and M&A activity has been slowly building up between the British, European, American and to some extent Australasian markets – China has been left largely out of the loop to date. Unsurprising, perhaps, given the general mismatches between China’s peer-to-peer market and its many global equivalents. There are a few exceptions within the broader alternative finance space. Leading real estate crowdfunding platform Wealth Migrate – which facilitates both equity and debt investments – recently opened its doors to Chinese investors, after opening an office in Shanghai.


Are we likely then to see more in the way of Western platforms moving into China, or vice versa? Don’t hold your breath, says Li:


“It would be impossible for any western firms to expand or do business in China, especially in an industry as complex as finance, without a Chinese partner.”


“So it’s more likely for a Chinese platform to expand outwards, but I don’t think we’ll see that any time soon since many of them are still fighting to keep the domestic market. A Chinese firm would not have any operating advantage either against local UK or US firms. The most likely scenario is for a cash rich Chinese platform to invest in a western platform.” 


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