Wolf Street on China

Implosion of China’s P2P Lending Boom Hits Consumer Spending

by Wolf Richter • Sep 9, 2018 • 7 Comments

First sign: auto sales suddenly plunged.

The Chinese government legalized peer-to-peer lending platforms in 2015. P2P sites attract money from individual investors – mostly savers – by offering them extraordinarily high yields. They lend this money at high interest rates to borrowers who have trouble getting loans elsewhere – classic subprime. By the end of 2017, there were over 8,000 P2P platforms, according to the People’s Bank of China, with over 50 million registered users. By the end of June, in a little over two years, the industry had gone from zero to $190 billion in outstanding loans.

That was the peak. But the fun didn’t last long. Borrowers defaulted on their loans or just absconded with the money, and the platforms began collapsing. In May this year, regulators stepped in. By the end of July, 4,740 P2P lenders had collapsed or where shut down.

Left holding the bag were millions of investors – mostly these savers who’d tried to make a better return on their savings in this newfangled risk-free manner. Suddenly, regulators told them that they should be prepared to lose their entire investments in these products.

The situation continued to follow the Chinese script. The savers started protesting in the streets. “P2P refugees,” as they called themselves, headed for Beijing Financial Street, where the People’s Bank of China has one of its buildings, and where most regulatory agencies are located. They were met by a large contingent of police.

Social unrest and display of public anger that might get out of hand being the greatest fear of the Chinese government, it was time for a bailout – particularly after the government-ballyhooed stock market collapsed for the second time in 2015 and remains collapsed to this day.

At the end of August, China Cinda Asset Management, one of China’s four big state-owned bad-debt managers, confirmed a previously rumored meeting with the China Banking and Insurance Regulatory Commission and said it would “proactively” help the government deal with the P2P fiasco.

Cinda and the other three big asset management companies – China Huarong, Great Wall, and China Orient – were established by the government in 1999, with funds from the PBOC, to buy a huge load of bad loans from the big four banks following the 1997 Asian Financial Crisis. These asset managers were supposed to liquidate these assets and then cease to exist, but now they’re bigger than ever and have become conglomerates, stuffed with distressed assets and scandal-tainted companies.

“P2P risks are a social issue of great concern in China,” Chen Yanqing, assistant to the Cinda’s  president, told reporters, according to the South China Morning Post. “As a professional company managing bad debt, we will proactively take part in tackling relevant risks and help the government address the issue,” he said, adding, “The regulators wanted to draw on our past experience about addressing bad debt risks.”

Cinda’s chairman, Zhang Ziai, said Cinda would use “investment banking thinking” in dealing with this bad debt, such as restructuring, liquidation, and debt-for-equity swaps.

Whatever happens to the savers whose money disappeared is one side of the P2P-implosion. The other side: Consumers who borrowed via the P2P system and spent this money. Suddenly these doors are closed. And this has now shown up in a plunge in auto sales that has totally surprised the industry.

Investment bank Stanford C. Bernstein, cited by the Automotive News China, estimated that P2P loans in 2017 had contributed about 9% to total new-vehicle sales.

Shanghai-based Shenwanhongyuan Securities, also cited by Automotive News China, estimated that P2P lenders had contributed about 10% to 15% to new-vehicle sales.

Whatever the exact percentages, P2P loans had become in important driver in new-vehicle sales. But the sudden implosion of the industry and the government crackdown have brought this lending activity to a near-halt – and these often-young borrowers might not be able to borrow elsewhere.

This might explain the sudden drop of auto sales in July.

In May, new vehicle sales still surged 7.9% from a year ago. Through the first five months of the year, sales were up 5.1%. But in June, the year-over-year sales increase eased to 2.3%. And in July, sales actually fell 5.3% year-over-year.

The July sales decline was driven by an inexplicable 8% drop in the previously hot demand for crossovers and SUVs.

August sales numbers will come out shortly and should shed more light on the impact of the collapse of P2P lending.

That 5.3% decline in July was a big, sudden, and unexpected swing from the 7.9% surge in May. The industry, which is still struggling to explain it, has come up with all kinds of explanations. But Automotive News China managing editor Yang Jian writes:

The sharp cutback in lending provides a more convincing explanation for the sudden softening of new-car demand in China than other factors typically cited by analysts, such as a slowdown in economic growth and the escalating trade war with the U.S.

In the second quarter, China’s GDP growth slowed to 6.7% from 6.8% in the first quarter. On July 6, the Trump administration imposed an additional tariff of 25% on Chinese goods worth $50 billion. It’s true both factors might have affected China’s new-vehicle sales to some extent, but not so soon and so dramatically as Beijing’s crackdown on P2P lending platforms.

The sudden flood of loosey-goosey lending by P2P platforms to consumers, particularly to young consumers with subprime-type credit records, that commenced in 2015 and suddenly ground to a halt this year wasn’t only spent on new vehicles. It was spent on all kinds of consumer goods. With that source of risky debt drying up, the spending that had been funded by this debt is taking the hit. And savers who’re losing their life savings on their P2P investments are probably not encouraged by their losses to spend even more.

An entire generation on Wall Street has never seen Treasury yields this high. Read…  These “Gradual” Rate Hikes Start to Add Up: US Treasury Yields up to Three Years Hit 10-Year Highs

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