De-risking China's online lending platforms

The drastic shrinkage of the online lending business is a result of tightened regulation starting this year as financial authorities, both at national and local levels, ordered P2P lenders to reduce their existing business scale and reduce the number of creditors and borrowers on the platforms. Regulators also required the platforms to connect their real-time operation data with the regulatory system. Those who fail to do so in time will face business shutdown.

The intensified government scrutiny underscored the regulators' concern that the explosive growth of P2P platforms appears to be running out of control and the risks associated with the business could spread to the rest of the country's financial system and threaten the stability of the overall economy.

Ever since the online lending business first emerged in 2007 in China, the sector has been plagued by rule violations, illegal capital pooling and outright fraud. Some of the platforms have turned into Ponzi schemes, which ended with platform owners running away with investors' money. One of the most high-profile scandals included the case of online lender Ezubao, which illegally raised nearly 60 billion yuan from the public and engaged in fake or fictitious investments.

Sector experts said that given the continuous stringent government scrutiny and crackdown, a major sectoral consolidation is on the way and there is likely to be more closures of P2P platforms in the foreseeable future.

"The regulators have issued a series of instructions to consolidate the industry. The trend of decline in the industry in terms of the number of platforms and value of outstanding loans is likely to continue," said Dai Zhifeng, an analyst at Zhongtai Securities.

The country's top banking regulator is still in the process of formulating the regulation to standardize the P2P sector. The much-anticipated registration process, which was seen as the first step in introducing P2P licensing system, has been delayed. So far, no online lending platform is officially registered with the regulator or obtained the P2P business license.