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Published on : Apr 28, 2015

According to a report released by BofA Merrill Lynch Global Research, the unregulated P2P (peer to peer) lending sector in China may pose serious problems related to the high default risk. The industry has witnessed spontaneous growth and had reached RMB100 billion (US$16 billion) by 2014. In order to increase competition in the private banking sector, the Chinese government had not really regulated the growth of the P2P lending sector. The country’s security regulator along with the People’s Bank of China has started working on a regulatory framework for the sector.

Similar to the various wealth management products sold by the banks and the financial institutions, the P2P products are priced and sold to the customers as debt or deposit. The P2P platforms charge at a very high rate and have weak credit control. Some of the platforms run pools which might turn into fraudulent schemes. In case of default, it is not clear that who would bear the risk. The P2P platforms assure the lenders with implicit or explicit guarantees, charge the borrowers at very high rates -24% to 36% per annum, and pass on only 8% to 15% back to the lenders. The high profit margin made by the P2P platforms makes the business look lucrative. 

However, the present weak phase of the Chinese economy may give rise to defaulters who would be unable to pay such high rates. Then the damage would not be restricted to only P2P sector. The P2P platforms also serve as funding channels for other shadow banks which includes high-risk lenders. Failure of the P2P platforms will affect the shareholders such as listed banks, internet companies, industrial companies, insurers, and brokers.