China's Super-Bus Exposes Dark Side of P2P Lending
(Bloomberg View) -- It looked like the future: a wide, elevated Chinese bus that would speed atop tracks straddling the road while multiple lanes of traffic flowed below. And the future looked surprisingly near. In early August, a prototype of the Transit Elevated Bus -- or TEB -- was tested in northern China.
Just as international excitement began to build, however, the TEB story went off the rails. According to China's state media organs, previously big boosters of the project, the TEB was little more than a publicity stunt -- one of the dozens of peer-to-peer lending scams that have duped retail Chinese investors in recent years by promising unreal annual returns.
The bus bust has thus become a symbol of a different -- and far more damaging -- kind of Chinese ingenuity. The TEB's promoters promised investors 12 percent returns on their money, despite the fact that the prototype bus seemed likely to tip over, couldn't clear most urban bridges and wasn't tall enough to accommodate most vehicles underneath it. They could get away with it in part because those kinds of numbers are par for the course in China's P2P lending industry, which averaged returns of 13.3 percent in 2015.
Demand for such loans has exploded in recent years, growing in volume from $4.3 billion in 2013 to $71 billion in 2015. The appeal is twofold. First, China's big state-owned banks have traditionally focused their attention on other companies in the state sector, at the expense of consumers and small businesses. A budding entrepreneur, or a young couple looking to pay for a wedding, often had to rely on the goodwill and deeper pockets of friends and family, loan sharks and, more recently, unregulated "shadow" lenders that specialized in expensive, short-term loans.
Meanwhile, cash-rich Chinese are anxious to find yields higher than the anemic rates paid by China's state banks, which typically fall below 3 percent. China's dodgy stock markets aren't a terribly appealing alternative, while the attractiveness of Chinese real estate varies by region. In big cities where property can still produce good returns, the price of entry is oftentimes too rich for China's middle classes. And for retirees looking for little more than a steady income, it's too much of a gamble.
On the surface, P2P products seem like a tantalizing investment alternative, especially when they're linked to glitzy projects such as high-end real estate or futuristic, road-straddling buses. But as far too many investors have learned in recent years, the opportunities for abuse are rife, with many lenders collecting funds before they ever have a targeted loan -- or any intention of lending. In those cases, P2P might be better described as peer-to-Ponzi.
The idea for an elevated bus was cooked up long before anybody had heard of online P2P. In 2010, its inventor claimed that the TEB was about to undergo a much-touted trial in Beijing. That test was canceled amid doubts about the technology and the integrity of the people behind it.
Lacking funds, the TEB disappeared until the technology was acquired last year by Bai Zhiming, a property developer with no background in mass transit. He resuscitated the project using a P2P lending platform, Huaying Kailai, that raised $26 million promising high returns to be paid out years in advance of any potential deployment of the technology. According to an executive at Huaying Kailai, at least 200 investors have now requested refunds.
As such scandals spread, the potential for a backlash among angry investors has Chinese leaders deeply worried. Earlier this year, the government began demanding that local officials shut down retail P2P storefronts and suspend registration of companies with finance-related names. State media is reporting that further regulations are in the works, including caps on loan size.
Yet frauds keepturning up, in part because the P2P industry isn't just a local problem. Lenders operate across cities, regions and provinces, and tackling them requires a legal and technical sophistication that's beyond the capabilities of many local governments. Ultimately, officials in Beijing are going to have to bring to bear the kind of regulatory firepower they already apply to the state-owned banking sector.
That'll erode some of the dynamism that's made Chinese P2P lending so attractive, not to mention bring down those ludicrous returns. Some innovations, though, can ride a bit too high.
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To contact the author of this story: Adam Minter at aminter@bloomberg.net.
To contact the editor responsible for this story: Nisid Hajari at nhajari@bloomberg.net.
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