Shanghai regulators are ordering more than 40 peer-to-peer (P2P) lenders to get ready to close shop, the Financial Times (FT) reported on Thursday (Oct. 31).
Authorities are giving P2P companies time to wrap up their business affairs, but “the ultimate goal is zero on the balance sheet,” a source told FT.
Some of the nation’s biggest platforms – Lufax, Dianrong and Madai Finance – have been told in recent meetings with Shanghai’s financial services bureau to stop issuing new products, the source said.
China’s P2P sector emerged during a wave of deregulation and has operated with little oversight. It was intended to provide loans to smaller borrowers and to give savers access to double-digit yields.
P2P lending fell under scrutiny when President Xi Jinping starting cracking down on financial risk. The sector was plagued by fraud and defaults after having topped $150 billion in outstanding loans.
“An attempt to shut down the industry in China’s largest financial hub represents one of the harshest government measures to date,” the article said.
Some investors who lost money in the sector complained to regulators, and P2P lending started to be seen as a “threat to social stability.”
Scandals also turned a negative spotlight on the P2P sector. Billionaire Dai Zhikang turned himself into Shanghai police last month in connection with illegal fundraising, and he closed his P2P lending unit Laocaibao.
In July, it was rumored that Lufax, which is backed by Ping An Insurance, was planning to exit P2P due to tougher regulatory issues in China. Sources told Reuters at the time that the company had already started the process of applying for a license in consumer finance. In addition, it was reported that the P2P division’s employees would move to the consumer finance business.
Lufax had been struggling since 2016 to meet requirements. P2P lenders were required to record the flow of funds between various parties and accounts, to provide reports on online deposits and to establish an accounting system with well-defined and standardized fund deposit clearing.