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Another scandal brews in China’s P2P lending sector as authorities investigate Hangzhou’s largest microloans provider

Hangzhou’s public security bureau said they will be taking action to prevent losses at Weidai and recover stolen funds.

Photo by Eric Prouzet on Unsplash.

China’s scandal-hit peer-to-peer (P2P) lending sector is once again in the spotlight. This time authorities are investigating Weidai (Hangzhou) Financial Information Service, Hangzhou’s largest online microloans provider, for alleged illegal fundraising activities.

“The public security authorities will start checking and exerting control over the relevant assets and manage the process of stolen funds retrieval and loss limitation,” according to a statement released late on Saturday by the city’s public security bureau.

The authorities appealed to the company’s creditors to cooperate with the investigation and not to believe in and spread rumors. They also said that they would come down hard on illegal gatherings if the creditors do not express their claims in a reasonable and rational manner.

In a separate statement posted on its Weibo account addressed to Weidai (Hangzhou)’s online borrowers, the bureau urged them to “proactively” repay their loans. Those who fail to do so on time will be included in the government’s “social credit system blacklist,” which could block them from future purchases for daily necessities, access to public transport, and bank loans.

Emails and phone calls to the company requesting comment on the investigations were not answered.

The latest investigation comes after a string of scandals in the sector in the past few years that have wiped out the savings of millions of Chinese investors attracted by higher returns compared to bank deposits. P2P lending is a form of shadow banking where loans can be made through an online platform outside traditional institutions.

Ezubao, once China’s biggest P2P lending platform, folded in 2016 having collected 59.8 billion yuan (USD 8.5 billion) from more than 900,000 investors. In 2017, chief Ding Ning was jailed for life for his role in the country’s biggest Ponzi scheme.

Weidai (Hangzhou), operator of one of China’s largest online car-backed financing platforms, is controlled by Weidai, which listed on the New York Stock Exchange in late 2018. It had a P2P market share of 35% in 2017, according to Weidai’s 2018 annual report. Most of its borrowers were owners of small enterprises, while its funding came mostly from small investors and institutional partners.

Weidai’s shares have lost 90% of their value since they peaked at USD 13.2 in February last year. They closed at USD 1.33 last Thursday.

However, tighter regulation has seen the number of P2P services providers plunge to 343 in 2019 from 2,680 in 2016. Gansu, Hebei, Hunan, Chongqing, and Sichuan were among the areas that ordered a complete shutdown of P2P lending last year.

Last November, Beijing ordered all existing P2P platforms to meet new regulatory requirements within two years. This includes a minimum registered capital level of 1 billion yuan to receive an online microlending licence to operate nationwide—the same as commercial banks.

As a result, Weidai (Hangzhou) announced its exit from the online lending intermediary service business by June 30 this year, saying it would rely on its institutional partners for funding. In its annual filing to the NYSE in June, it said that investors in its investment products that funded its lending business would be repaid when they become due.

Read this: Collapse of China’s disgraced P2P sector offers important lessons

The company’s net profit plunged 65% to 253.6 million yuan last year from 2018, as provision against potential loan delinquencies surged 65% to 1.24 billion yuan. Revenue slid 14% to 3.9 billion yuan.

Founded in 2011, it was China’s first company to provide car loans adopting a global positioning system-enabled mobile app to detect fraud and take vehicles into custody. The practice has since become industry standard, replacing the traditional model of lenders keeping cars in custody to back loans.

The car-backed loans it facilitated last year had an average principal of 59,615 yuan and an average tenure of 22 months, and 60% of its customers were repeat borrowers, Weidai said. It charged annualized interest rates of 20–36%.

TF Securities’ analysts in a note last month that the sector’s business model had become more fragile, pointing to the rising delinquencies seen at online consumer credit provider Qudian and a slowdown in demand for credit due to the pandemic.

“The pandemic could be the last straw on the camel’s back for the 12-year-old P2P sector,” they wrote.

This article was originally published by the South China Morning Post