The rich farming soil in centralChina is an unlikely field for financial innovation but that is exactly what it has become.
When Shang Meigong faced a cash crunch in her vegetable seed business in Xiangyang, Hubei province, she was turned away by local banks and decided to look to the internet for funds. CreditEase, the biggest of a fast-growing pack of peer-to-peer lending websites, paired her up with wealthy people across the country who lent the Rmb50,000 ($7,900) that she needed.
“It took just a few days to get it. The interest rate was lower than from loan sharks and higher than from banks, but the banks wouldn’t lend me anything,” Ms Shang says.
Peer-to-peer, or P2P, lending websites are at the leading edge of a microcredit boom in China. For a service fee, they connect people wanting to invest money with those looking to borrow small amounts, whether to attend school, buy a computer or start a business.
In so doing, they are providing a platform for loans to entrepreneurs who have founded some of the country’s most productive businesses and yet have long been neglected by banks, seen as too risky or simply too small.
The P2P boom has not been trouble-free. The bankruptcy last year of one lender, Hahadai, exposed the risks and prompted regulators to tighten their supervision, with the China Banking Regulatory Commission warning that some P2P companies “were unable to ensure the safety of the loaned funds”.
But advocates say the lending sites are beginning to reshape the face of Chinese finance and make China a focal point for the fledgling P2P industry worldwide.
“China has much more P2P potential than the US. You can understand the lack of credit penetration simply by being on the ground here,” says Roger Ying, who launched Pandai.cn, a P2P website, last year. “It is filling an important void in the financial system.”
The government has prodded banks to lend more to small businesses but banks still favour larger enterprises, which can offer property as collateral or have state backing. That gap in lending has opened the door to a new breed of lenders: microcredit companies.
There are 4,144 microcredit companies in China, a seven-fold rise over four years, and their total lending increased 87 per cent last year to Rmb369bn, ($580 million) according to government data. While many are bricks-and-mortar institutions, from pawn shops to trust companies, Taobao, the Chinese rival to Ebay, has demonstrated in the retail industry that online businesses can flourish in China because the internet reaches vast areas of the country still untouched by big brands.
The first P2P lending website was launched five years ago and Mr Ying estimates that there are at least 100 now. CreditEase says it alone has about 100,000 borrowers and that its loan book has been increasing 50-100 per cent year-on-year.
“It’s because people really need help and are not covered by the traditional banking system,” says Tang Ning, chief executive of CreditEase.
The potential in China is far bigger. “There are about 60m micro-entrepreneurs in cities and 200m rural poor, so it is a huge market opportunity,” Mr Tang says.
P2P lenders in China have an image problem, however. They have been damaged by association with China’s “underground banks” – illegal lenders that charge annualised rates as high as 60 per cent. Established lending sites such as CreditEase and PaiPaiDai say their average rates for borrowers are much lower, at about 20 per cent.
There have been concerns too about the P2P business model. Borrowers typically must provide personal information, including their all-important ID number, which is released to lenders if borrowers default. Yet it is still unsecured lending, with no collateral posted.
Nevertheless, regulators appear to be gradually warming to the sector, which Mr Tang says is seen as a way to make “underground lending” more transparent.
The P2P companies have also become more upfront about confronting risks. At Pandai, Mr Ying has created a protection fund to partially backstop the lenders if borrowers default.
“It is still too early to pick winners from losers in microcredit,” says Victor Wang, a banking analyst with Macquarie Securities. “But if these operations are doing genuine business and not becoming loan sharks, then they are at least helping small corporations to have better credit access.