Huang says that P2P lending, operating "under the guise of an internet platform, runs counter to the principles of modern financial risk management," as it is characterized by high interest rates, unjustified loan sharking and unauthorized fundraising.
One of Huang's most salient points focuses on leverage in P2P lending. He points out that traditional banks rely on proper capital adequacy ratios to protect themselves against bad loans and other losses. Regulators decide the capital adequacy ratio to ensure that commercial banks do not take on excessive leverage that would put them at a high risk of insolvency.
P2P lending in China, however, has no such provisions. The business model relies on offering lucrative returns to retail investors serving as depositors, while charging borrowers high interest rates. It's an accident waiting to happen. "Once something goes wrong, either the P2P firm will take the money and run, or it will be paralyzed and unable to function," Huang says.
However, Huang is not against online lending per se, just the P2P business model. Online lending firms are important to the development of fintech and financial inclusion, in particular for small businesses, he says.
P2P lenders still exist in China, but the sector is a shadow of its former self. According to Caixin, about 5,000 firms have exited the industry since the crackdown began in 2016. As of March 31, there were just 139 P2P lending platforms left, down 86% from early 2019. Outstanding loan volume had also fallen 75% over that same period.
Beijing has urged P2P lenders to rejig themselves as licensed microlenders or consumer financing companies, but that's easier said than done. Licenses are hard to come by, unless the ex-P2P lender has another company that holds the license already or is eligible to apply for one.
Ultimately, China's internet finance giants will be the winners. Ant Group's MYbank and Tencent's WeBank have long dominated China's online lending market. To be sure, new competition could challenge their duopoly, but it is likely to come from other well capitalized tech heavyweights.
In June, China's 360 Finance Inc said that it would take a 30% stake in the private lender Kincheng Bank of Tianjin in a bid to grow its online lending business. Partnering with Kincheng will allow 360 Finance to offer interest rates on loans less than 18%. Banks working with 360 Finance typically offer interest rates about 6% higher.
The average interest rate on small business loans issued by China's 18 largest banks is 4.94%, according to Bloomberg. That rate is relatively low compared to the aforementioned rates because Chinese banks require more collateral from borrowers than online lenders.