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Lufax, one of the largest Chinese fintechs, is considering exiting the peer-to-peer (P2P) lending business, through Reuters citing sources with direct knowledge of the matter.
Lufax’s exit is said to be linked to new regulatory hurdles P2P lenders face in the country, and this is particularly noticeable because P2P was once at the heart of Lufax’s business: although it now operates one of the largest China’s wealth management platforms, it started as a P2P lender. Lufax denied reports that it would withdraw from the segment altogether, however claiming it was simply downsizing the company in line with regulatory requirements, through the South China Morning Post.
Here’s what that means: The Chinese authorities’ purge of the bloated P2P segment has hit other players hard, but Lufax’s announced exit could signal an even more serious impact than initially expected.
China’s P2P market had exploded rapidly out of thin air in recent years, but lax regulatory oversight allowed corruption to seep in – now Chinese authorities are trying to clean that up. By the end of 2017, the once-negligible industry loan stock had swelled to over 1.22 trillion yuan ($ 177 billion), through Bloomberg.
A host of factors have helped P2P lending gain traction: the inability of consumers to access incumbent credit, a growing cash-rich middle class, and Beijing’s encouragement of fintechs to help reform the country’s banking system. country. However, a lack of regulatory oversight has also created fertile ground for illegality, with Ezubao’s 76 billion yuan ($ 11 billion) Ponzi scheme being the most notable example.
Amid consumer unrest and the threat of risk spreading to the rest of the country’s financial system, Chinese authorities have imposed a crackdown on space. The result: More than 80% of the country’s 6,200 P2P lenders were closed or in trouble, according to Yingcan cited by Bloomberg. And the P2P abandonment reported by Lufax is due to its own difficulties in meeting these new requirements, according to Reuters.
Lufax is unlikely to go bankrupt due to the crackdown, but the impact will likely be much worse for smaller players whose entire business is built around P2P. Lufax is reportedly in the process of restructuring its online lending operations and intends to apply for a consumer loan license that would allow it to offer online shoppers a range of loans for purchases.
The company has also diversified its business, including its now huge wealth management platform, while being backed by Ping An, one of China’s largest financial firms. Small players, however, appear to have a much more worrying future: only 50 of the country’s remaining 1,200 P2P platforms are expected to get regulatory approval to continue operating, according to Citigroup data cited by Bloomberg.
The overview: China isn’t the only country trying to harness the P2P space, but regulators must be careful not to disrupt popular services and leave consumers addicted to P2P without service.
The United Kingdom is another notable jurisdiction which is tightened P2P regulations amid the concerns of retail investors. As a result, a number of P2P companies are likely to encounter difficulties as they find their retail investor base severely constrained. But in the event of broader restrictions, regulators need to ensure continuity in the loopholes that P2P lenders fill, which has made them so popular with borrowers in particular.
These platforms provide access to capital that is difficult to obtain from banks. To this end, UK central bank chief Mark Carney has in the past Underline the importance of these actors in the granting of credit to small and medium-sized enterprises (SMEs).
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