As China’s slowing growth and tightening credit draw headlines abroad, inside the country some borrowers are turning to alternative, quasi-legal lenders for cash.
On the Internet, a variety of small-scale lending websites are capitalizing on the credit crunch by offering to connect borrowers who may not qualify for conventional loans, with lenders eager to make a higher return than those offered by banks.
In just a few years, such peer-to-peer lending websites have become vast marketplaces that offer loans for almost any purpose, and have become popular among middle-class Chinese.
Li Zhigong, who works as a fireworks retailer, this year turned to one such online platform to borrow almost $500 (3,000 yuan) to fund his hobby, online videogames.
“I didn’t feel at ease asking people around me for money and there was no need to turn to the bank for a loan to play videogames” he says.
Yang Yifu founded the website Renrendai.com three years ago. This year the platform expects to administer loans worth some $326 million (2 billion yuan). Creditors can contribute as little as $8 (50 yuan) and borrowers can receive as much as $8,000 (50,000 yuan).
“There is still a lack of individual financial services in traditional financing channels in China,” says Yang Yifu. His clients own small businesses. "They are young white collar workers with needs for further studies. They want to refurbish their house or get married.”
For them, Rernrendai.com and more than one hundred similar websites make it easy to borrow money. Individuals register on the platform and search for matching partners. The website charges transactions fees for revenues and has little difficulty attracting investors.
Renrendai.com’s loans yield between 10 and 18 percent, higher than the 3.25 percent offered by one-year term deposits in banks.
Dong Huibo is an online lender. Since he registered on a peer-to-peer financial platform last May, he has loaned more than $32,000 (200 thousand yuan).
“Fixed deposits are not good because they offer low interest rates, and funds need big initial investment of hundred of thousands of yuan. This you can do whether you have only a hundred yuan or a lot of money, and you can have a good financial liquidity as you can choose even short-term loans of one month to invest in,” says Dong Huibo.
Yang Yifu says borrowers expect to pay high commissions. “Because of the lack of financial services to individuals, these borrowers have a hard time in raising funds and are ready to accept higher interest rates to meet their needs.”
Peer-to-peer lending websites are thriving, but they fall in a gray area that, at present, is not regulated by any Chinese financial institution.
“For the time being, we make the rules ourselves with our understanding of the market and thinking that part of the customers are easy to supervise,” says Yang Yifu.
Renrendai.com and other platforms enforce strict rules to check on borrower's reliability, but loan defaults are still a concern for investors.
Dong Huibo says lenders select platforms carefully. “Investors don't trust all the platforms. They hesitate and fear it will collapse some day. These things happen. There's someone who flew with the money, four or five went bankrupt, but actually the proportion is not that large and the rate is not too high,” Dong says.
As the online lending services have grown in popularity, businessmen have increasingly turned to the peer-to-peer websites for loans that bypass commercial banks.
China's traditional banking system is now concerned that online lending services could expand out of control.
Banks have accused these websites of taking on business they are not allowed to operate.
China's Banking Regulatory Commission recently issued a notice warning that peer-to-peer companies are evolving into illegal financial institutions attracting loans and even conducting illegal fund raising.
Last month, People's Bank of China, China's central bank, published a report on peer-to-peer lending websites based on a survey of companies based in Hunan, Shanghai and Chongqing. The report said that they illegally offer wealth management products, solicit deposits and offer loan guarantees.
PBOC's studies, however, admit that there is no consensus regarding which institution should oversee the lending businesses or how it should be regulated. Despite the ambiguity, the government is starting to crack down. In recent days regulators shut down five peer-to-peer lending websites in Chongqing for conducting illegal business.
At Renrendai.com, Yang Yifu says websites like his are actually responding to a need in the Chinese financial world.
“So far we haven't had much business interaction, but we're doing essentially the same thing, we're just facing different markets.”
Yang says he hopes for more interaction between his e-commerce and traditional financing corporations. He says they need to work together to design rules and allow the new industry to grow.