China's peer-to-peer lending boom is beginning to turn to bust.
Dozens of the P2P lending websites that sprang up in recent years have shut as borrowers default on loans. The biggest companies are unscathed so far, but the rapid collapse of smaller rivals highlights the mounting difficulties in the Chinese micro-lending industry as economic growth slows and monetary conditions tighten.
It is a dramatic reversal of fortune for China's peer-to-peer websites, which, for a small service fee, connect people wanting to invest money with those looking to borrow small amounts.
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The shift is also an early warning that rising interest rates could pose problems for the sector in the US and Europe, where P2P lending has expanded rapidly in recent years as banks scaled back their lending. In China, P2P companies lend to some of the country's riskiest borrowers, so they were among the first to face defaults as monetary conditions tightened.
Although the sector accounts for a tiny fraction of China's total loan book, the country's P2P lending market grew from $30 million in 2009 to $940 million in 2012 and is on track to reach $7.8 billion by 2015, according to research published last year by Celent consultancy.
Of the nearly 1,000 P2P companies operating in China, 58 went bankrupt in the final quarter of last year, according to Online Lending House, a web portal that tracks the industry. Several more had already run into trouble this year, it added.
The signs of distress began to emerge in the second half of last year, when China's central bank withheld liquidity from the money market and fuelled a significant jump in lending rates.
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"The main reasons are the intense competition in the P2P industry, the liquidity squeeze at the end of the year and a loss of faith by investors," said Xu Hongwei, chief executive of Online Lending House.
He estimated that 80 or 90 percent of the country's P2P companies might go bust.
People in the industry had hoped that P2P lenders would fill a hole in China's financial system by helping small businesses obtain funding and by giving investors higher returns than they can obtain from banks.
While proponents believe that will still eventually prove to be the case, many believe the industry has expanded too quickly and with insufficient oversight.
"A lot of P2Ps have blindly copied each other and they don't have a business plan that is robust enough to react to market changes. They've just focused on sales, scale and bragging to each other," said Roger Ying, founder of Pandai, one of the websites that is still active.
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Wangying Tianxia, a Shenzhen-based lender, was one of the biggest P2Ps to fail, according to the Shanghai Securities News, an official newspaper. Between its founding in March last year to its failure in October, Rmb780 million ($129 million) of loans were disbursed via its platform.
A second China-wide cash crunch at the end of December heaped more pressure on P2P lenders. Fuhao Venture and Guangrong Loans posted notices on their websites in the first week of the new year warning investors that loan repayment might be delayed.
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Amid concerns about the uncontrolled growth of the industry, the Chinese central bank last year said it would more closely supervise P2P websites and it reminded companies that illegal lending practices, such as investing their clients' money in financial products, were punishable by death.
Some believe the turmoil will be good for the industry, eliminating the weaker P2P companies and leaving a smaller, better-managed group.
In a sign of that optimism, TrustBridge Partners, a Chinese venture capital firm, invested $65 million last week in Renrendai, one of the country's biggest P2P lending companies, as part of a $130 million funding round.