Banking | Online loans offer 9 pct return to twitchy investors: China Credit

The latest hot product in China’s shadow- banking industry is giving Chen Ruogang the convenience of Internet commerce, triple the returns of deposits and regular free fruit hampers. It hasn’t bought him peace of mind.
The 58-year-old film maker is earning a 9 percent return on an online platform connecting individuals with businesses in need of cash, higher than the 2.75 percent benchmark savings rate and the 6 percent he used to make on similar offline wealth-management products. The peer-to-peer lending site he invests with, called Lufax.com, finances everything from property to infrastructure, with some products carrying guarantees from China’s second-largest insurer.
“I don’t care what the projects are about, I care more about the returns,” Chen said in a Feb. 8 phone interview from Chengdu city. “But if I read many news stories about such companies defaulting and management vanishing without repaying investors, I’ll liquidate my investments.”
Chen has reason to be worried as research company Yingcan Group says 275 of the P2P platforms went bankrupt or had difficulty repaying money in 2014, up from 76 a year earlier. People’s Bank of China Deputy Governor Pan Gongsheng last commented in November that the authority will seek to regulate Internet finance while allowing it room to grow. The unwinding of coal investment trusts a year ago shored up investor confidence because holders of the failed products got most of their money back, encouraging risk taking.
Lufax is one of about 1,400 loan platforms that have emerged in China, luring more than 110 billion yuan (USD17.6 billion), according to the PBOC. Financial innovation designed to get around loan restrictions, known as shadow banking, contributed to a quadrupling in total debt in China to $28 trillion in June last year, or 282 percent of the economy, from $7 trillion in 2007, according to McKinsey & Co.
The value of the nation’s peer-to-peer lending transactions surged almost 13-fold since 2012 to $41 billion last year, according to Yingcan Group, which tracks the data.
Ping An Insurance (Group) Co.’s Lufax.com has options that allow people to invest amounts lower than the 50,000 yuan regulatory floor for wealth-management products. For instance, an investor can put a minimum 10,000 yuan into a one-year project for 7.84 percent in expected annual returns. This series of products is backed by a guarantor owned by Ping An, and investors will get the remaining principal and some compensatory interest payments even if the borrower defaults, according to the website and an e-mail from Lufax.
The risks from online shadow banking, like its offline inspiration, are exacerbated by a lack of defaults in China. A 3 billion yuan trust product created by China Credit Trust Co. for a coal miner was bailed out days before maturity in January 2014, averting what would have been the nation’s first trust non-payment in at least a decade.
Chinese banks’ bad-loan ratio jumped the most in at least a decade in the fourth quarter as a property-market slump and a slowdown constrained borrowers’ repayment ability. The world’s second-largest economy may expand 7.2 percent this year, the Chinese Academy of Sciences said last month, after growing 7.4 percent in 2014, the weakest pace since 1990.
“Do people know what they’re buying?” said Kevin Yeoh, Hong Kong-based managing director at investment research firm J Capital Research. “With financial innovation in China, there’s some skepticism initially, but gradually a crowd builds up around it and those that think they are in the know, think they know which are more reputable, when none of them are that reputable.”
The popularity of Internet finance has drawn cash from offline shadow-banking products, which also originally arose to lend to debtors unable to borrow from traditional banks, Yeoh said. The unregulated financial system, both online and offline, has contributed to deposit growth plummeting from its peak in 2009 to the least on record in December. This may curb bank lending and make monetary policy less effective at a time when economic expansion has slowed.
“As we’re observing a trend where more and more wealthy investors are pouring money into online P2P for higher returns, banks will be increasingly challenged in the future,” said Wang Weidong, an analyst at Internet consultancy iResearch in Beijing.
Internet finance has fulfilled diverse funding needs including micro and rural financing, the PBOC’s Pan Gongsheng said Nov. 26. Regulators need time to observe and understand the industry’s developments, and will nurture it with market thinking, he added. The monetary authority didn’t respond to a fax seeking comment.
In December, the police started a fraud investigation at Zhonghuizaixian.com, a peer-to-peer lending website that partners with Sina Corp., after claims it misappropriated bankers’ acceptances that backed a wealth product Sina helped sell. The website said it received claims from 120 investors demanding as much as 55 million yuan. In another case, Sohu.com Inc.’s peer-to-peer platform pledged last month to guarantee a wealth-management product related to Kaisa Group Holdings Ltd., a developer that was teetering on the brink of default.
Regulations will likely focus on evaluating the credit risk of borrowers, said Chris Powers, an associate at consultancy Z- Ben Advisors Ltd. in Shanghai. He added that the Internet offers some advantages, with the availability of an online secondary market improving liquidity.
Lufax user Chen — who says he has received gifts from P2P companies including 2000-yuan gift cards for gas stations, fruit hampers and wine — is following the news keenly for any updates on regulations or performance. He has subscribed to the platforms’ posts on messaging service WeChat and keeps himself informed by looking at industry sites. Lufax.com says on its homepage that all investors in its three-year history have received the expected returns on their purchases.
“I’m always concerned about my money, but the high returns are just irresistible,” Chen said. “The service is so much better than at banks. The managers are willing to help me and they give me gifts on holidays.” Bloomberg