P2P lending sees growing scrutiny

As China advances its supply-side structural reform, a large number of struggling financial companies will be eliminated, thus exposing once-concealed online financial risks.

Peer-to-peer, or P2P online lending platforms, reflect the explosion of online financial risks. Statistics provided by independent P2P portal wdzj.com shows that there were 3,858 P2P in operation at the end of last year, and 1,263 of them had operation problems. Most of these platforms promised an extremely high return rate, as much as 10 percent annually. Meanwhile, they illegally established capital pools.

Platforms which have been reported with problems have mostly crossed the red line of illegal fund-raising. The problem is not with online finance itself but rather a lack of supervision, according to a report jointly released by the China Europe International Business School's Lujiazui Institute of International Finance and the Beijing-based Internet Finance Institute.

Investors should take a wait-and-see attitude toward these platforms, suggests Wang Jun, adjunct professor of finance at China Europe International Business School.

"Smart investors usually question the companies' capability to provide investors a much higher return rate than banks do," he says. "Most P2P company owners usually reply immediately by explaining that they have a much lower cost, for they do not have any physical branches. Therefore, they can achieve higher efficiency and better margins, which they later transfer to investors," he said.

But Wang says such simple reasons cannot sustain P2P companies' much higher return rate compared to banks. Most P2P companies cannot find small and micro-sized enterprises that are willing and able to return the loans. Therefore, P2P companies give these loans to big company clients.

P2P companies used to develop new wealth management products to repay traditional products. But this happens only when investors' confidence remains strong and new investors keep coming in. Once a sign of disturbance or trouble appears, Wang says, they are very vulnerable.

"At this moment, investors should look at P2P projects in a more prudent way," he adds, noting that three years ago there was always a successor for any highly risky P2P product overthrown by another investor. Now, he says, if you want to transfer any product, knowledge that the outlook of this product is at risk will be widespread.

Online finance became a buzzword during the two sessions at the beginning of this year. According to the Report on the Work of the Government, online finance will see continued growth this year. But more importantly, the government will impose stricter supervision on the industry to ensure a sound and sustainable growth.