China has been catching up with the West in financial technology. Sadly, not all such progress is good. This week, official news agency Xinhua reported on a Ponzi scheme in China involving $7.6bn — around one-tenth of the funds involved in Bernard Madoff’s scheme, but affecting a million people.
News of the fraud came at the end of a consultation period on new rules for China’s P2P sector, and highlights the need for more stringent oversight. Unregulated lending has grown quickly as falling benchmark rates enticed yield-hungry savers into riskier products, just as they have elsewhere. Demand has also been strong: private sector small and medium enterprises (SMEs) often struggle to obtain financing from banks, resorting to less formal means of financing. Funding has also tightened following frauds at Agricultural Bank and Citic Bank.
Online lending failures tend to have a widespread impact. Unlike most developed markets, where institutions use P2P channels to disburse loans to diverse small borrowers, in China it is numerous small creditors that lend to larger debtors. In December last year, nearly 3m people invested $6,800 each into loans averaging $25,800 drawn down by only 780,000 borrowers, according to industry watcher Wangdaizhijia. The threat of unrest from numerous disgruntled savers may now outweigh concerns that regulation will hamper growth.