How China's P2P lending companies could “guarantee” a return

Written by Qinwen Wang || February 09 2016

“I don’t really care about what are the investment projects on the P2P platform or the borrowers’ details. My attention is more on the investment return, since most of the platform provide guaranteed return rate.”

This quote is fairly representative of China's P2P investors' thinking and reflects their attitudes towards risk, and their immature understanding of the peer-to-peer lending industry.... Recently, more than 90,000 investors who unluckily put their money into China’s Ponzi P2P platform Ezubao claimed that they were attracted by sophisticated marketing and promised big returns but never expected it to turn out to be a Ponzi scheme!

One of the major differences between Chinese and the Western P2P industry is the “guaranteed” return rate. China's platforms often guarantee capital return as well as absolute return. So not only do they guarantee you'll get your 1000 RMB back, you'll get it back with interest! So how can they do that? 

Asides from the "ponzi platform" that was Ezubao, other legitimate platforms tend to charge borrowers very high rates - up to 30%, and then pay investors with a 10%-12% return. After the marketing and operational expenses, the profit margin of the business could reach 10%-12%. In many cases, that massive spread allows the platform to guarantee the loans that do go bad. 

The “guaranteed’ return rate is quite an effective method of attracting investors. It might seem quite secure to the investors and it does work most of the time, except when too many of the projects and funds listed on a platform are not real. The money could go to the pocket of a fund raiser for personal use. Promised big returns turned out to be the biggest selling point that is not back by real investment cases.

The fall of Ezubao may be just a tip of iceberg of the insufficiently regulated P2P industry in China. It is a risky business. There were over 3,600 P2P platforms as the industry raised more than 400 billion yuan. Currently the draft regulation is under public discussion. Regulations may focus on evaluating the credit risk of borrowers. Aside from more staffing, funding and a central bank-led risk monitoring system capable of tracking Internet financial activity and flagging problems are highly required.