China's Peer-To-Peer Lending Bubble Bursts As Up To 90% Of Companies Expected To Default

Tyler Durden's picture

When it comes to the topic of China's epic credit bubble (which continues to get worse as bad debt accumulates ever higher), we have beaten that particular dead horse again and again and again and, most notably, again. However, since in China the concept of independent bank is non-existent, and as all major financial institutions are implicitly government backed, by the time the "big" bubble bursts, it will be time to hunker down in bunkers and pray (why? Because while the Fed creates $1 trillion in reserves each year, and dropping post taper, China is responsible for $3.6 trillion in loan creation annually - yank that and it's game over for a world in which "growth" is not more than debt creation). But just because the big banks can continue to ignore reality with the backing of the fastest marginally growing economy in the world (inasmuch as building empty cities can be considered growth), the same luxury is not afforded to China's smaller lender, such as its peer-to-peer industry.

Granted, in the grand scheme of things P2P in China is small, although in recent years, as a key part of shadow banking, it has been growing at an unprecedented pace: according to research published last year by Celent consultancy, the country’s P2P lending market grew from $30m in 2009 to $940m in 2012 and is on track to reach $7.8bn by 2015. Here's the problem: it won't. In fact, China's P2P lending boom just went bust because as the FT reports, "dozens of the P2P lending websites that sprang up in recent years have shut as borrowers default on loans. The biggest companies are unscathed so far, but the rapid collapse of smaller rivals highlights the mounting difficulties in the Chinese micro-lending industry as economic growth slows and monetary conditions tighten... Of the nearly 1,000 P2P companies operating in China, 58 went bankrupt in the final quarter of last year, according to Online Lending House, a web portal that tracks the industry. Several more had already run into trouble this year, it added."

And it's only going to get worse:

"The main reasons are the intense competition in the P2P industry, the liquidity squeeze at the end of the year and a loss of faith by investors," said Xu Hongwei, chief executive of Online Lending House. He estimated that 80 or 90 per cent of the country’s P2P companies might go bust.

Oops. None of this is unexpected: after the Chinese banking system nearly collapsed in June, following an explosion in overnight lending rates on just the mere threat of tapering of liquidity by the PBOC (since repeated several times with comparable results), it was inevitable that there would be unexpected consequences somewhere.

That somewhere is manifesting itself in the one industry that was supposed to gradually alleviate the lending burden for the SOEs.

People in the industry had hoped that P2P lenders would fill a hole in China’s financial system by helping small businesses obtain funding and by giving investors higher returns than they can obtain from banks.


While proponents believe that will still eventually prove to be the case, many believe the industry has expanded too quickly and with insufficient oversight.


“A lot of P2Ps have blindly copied each other and they don’t have a business plan that is robust enough to react to market changes. They’ve just focused on sales, scale and bragging to each other,” said Roger Ying, founder of Pandai, one of the websites that is still active.


Wangying Tianxia, a Shenzhen-based lender, was one of the biggest P2Ps to fail, according to the Shanghai Securities News, an official newspaper. Between its founding in March last year to its failure in October, Rmb780m ($129m) of loans were disbursed via its platform.


A second China-wide cash crunch at the end of December heaped more pressure on P2P lenders. Fuhao Venture and Guangrong Loans posted notices on their websites in the first week of the new year warning investors that loan repayment might be delayed.

So, condolences to China's P2P business model: if it is any consolation, you are merely the first of many debt-related dominoes to tumble in China.

But while the Chinese government has already thrown in the flag on P2P - after all at just over a $1 billion in notional how big can the damage be - it is desperately scrambling to give the impression that all is well in the other, much more prominent areas of its credit bubble. Which is why the WSJ reports that "China's government is gearing up for a spike in nonperforming loans, endorsing a range of options to clean up the banks and experimenting with ways for lenders to squeeze value from debts gone bad.

Write-offs have multiplied in recent months. Over-the-counter asset exchanges have sprung up as a way for banks to find buyers for collateral seized from defaulting borrowers and for bad loans they want to spin off. Provinces have started setting up their own "bad banks," state-owned institutions that can take over nonperforming loans that threaten banks' ability to continue lending.


"In recent years, Chinese banks have been exploring new avenues to resolve their bad loans," said Bank of Tianjin, which is based in northeastern China. The lender recently listed more than 150 loans for sale on a local exchange. "We will continue to recover, write off, spin off and use other avenues in order to resolve bad loans," it said.


China's banks reported 563.6 billion yuan ($93.15 billion) of nonperforming loans at the end of September. That is up 38% from 407.8 billion yuan, the low point in recent years, two years earlier.

Amusingly, just like in the US, where nobody dares to fight the Fed, in China the sentiment is that nothing can possibly go wrong at a level that impairs the entire nation: "Analysts think it is unlikely that Beijing would let major banks go bust. Still, investors suspect the cost of a cleanup could be a sizable economic burden and could become even greater if growth continues to slow."

Good luck with that, here's why:

"The last time Beijing confronted bad-loan problems, in 1999 and 2000, the sums involved had crippled the banking system. Banks became far less able to make new loans, forcing the government to take action. Some 1.3 trillion yuan of bad debt was spun off the books of the biggest state banks and swept into four purpose-built bad banks.


This time, to avoid a costly bailout in the future, the government is pushing the banks to clean up their mess early. It is giving them new tools to do so: the exchanges to sell bad assets, provincial-level bad banks and permission to raise fresh capital using hybrid securities, complex products that combine aspects of debt and equity."

One small problem: sell them to who? After all China is a closed system, and the US hedge funds have their hands full will pretending Spain and Greece are recovering and sending their stock markets to the moon because of the endless stream of lies emanating from the government data aparatus, all of it made up.

A potential constraint on the bad-debt cleanup is the inexperience of buyers at pricing and dealing with distressed debt, never a significant asset class in China. Finding buyers for a failed factory or commercial property seized as collateral can be difficult, particularly in cities with weaker economies.


"There's an immature market for collateral. So the banks' capacity to resolve loans is more determined by the market than their own abilities," said Simon Gleave, regional head of finance services at KPMG China.

Analysts see the bad-loan problem as a growing issue. Although figures as of the end of September indicate bad debt represents only about 1% of total loans in


China's banking system, a range of major industries are plagued with overcapacity and local governments are struggling to repay money borrowed to fund a construction binge. Investors broadly believe the actual bad-loan figure is much higher. The share prices of Chinese banks listed in Hong Kong have fallen, to trade below their book value.

And while all of the above is accurate, here is the biggest constraint: it is shown as the blue line in the chart below:

Applying a realistic, not made up bad debt percentage, somewhere in the 10% ballpark, and one gets a total bad debt number for China of... $2.5 trillion, and rising at a pace of $400 billion per year.

No, really. Good luck.

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yrbmegr's picture

Is this what we're not supposed to look at while we reflexively watch the South China Sea?

Future Tense's picture

It feels as if every part of the world is on the precipice of economic disaster at a time when asset prices are hitting new all time highs everywhere you look. The following discusses how central banks have created a short term "illusion" which will soon be revealed to be nothing more than a parlor trick:

Grande Tetons's picture

Here is the training video for all voting Fed members. 


TruthInSunshine's picture

China + Japan are going to drag the global economy into contraction (as measured in real terms, and probably nominal ones at that - that's how ill their economies are).

By the way, India, another important BRIC, just reported today that annual automotive sales fell YoY for the first time in a decade.

India's sick, Brazil is sitting atop a major credit bubble, we all know about the ill health of France+Italy+Spain and the smaller PIIGS...

...the U.K. and U.S. have levitated for the last 4 1/2 years on a tsunami of debt issuance and re-leveraging (government, corporate, inter-bank, consumer).

I wish logic would allow me to be honestly sanguine, but it's not in the cards, bitchez.

tmosley's picture

Wowee, is it finally happening?

NoDebt's picture

In a word, no.  Putting never-gonna-repay loans out there is just a tool to expand money supply when there are no PRODUCTIVE ways to invest it.  Loan it, write it off, bail out the banks, move on.  Money is still out there (guess who gets it), nobody important gets hurt.  

Oh regional Indian's picture

India is definitely not healthy. In fact, our decade long rise has been on the back of a weak rupee. Nothing more, nothing lesss.

Wage disparity, exploited to the max by the banks and now we have a fat and growing middle class that is neck-deep in debt.

Yep, there is a precedent to what comes next...

And tmos, I was logically off on the BTC thread yesterday.


TruthInSunshine's picture

I misspoke earlier - India didn't have a YoY drop in automotive sales for the first time in a decade... had a SIGNIFICANT YoY drop in automotive sales for the first time in 11 years!

willwork4food's picture

+10. At least they still have their utilized industrial base, and a few rainy days acumen of US treasuries (given to them by CONgress) to fall back on if things get really bad.

yrbmegr's picture

Can it be U.S. policy to honor debts to military aggressors?

NoDebt's picture

Let's not get ahead of ourselves.  They still enjoy "most favored nation" status with the US.  Flipping that 180* the other way isn't going to happen quickly, not even with a minor war over a few islands that we techincally defend.  Certainly not under this administration (3 more years).


yrbmegr's picture

You may be right, but it would be irresponsible not to speculate.

TruthInSunshine's picture

Gran Turismo 7: Chinese Ghost Cities

Playstation 3.

ZH Snob's picture

this is all part of the worldwide race to the bottom leading to a complete reset of the world's economy.  and you can be sure that once the reset takes place the gulf between the haves and the have nots will be wider than ever.

Muppet Pimp's picture

If your previous post is correct the poor chaps in the Phillipines look to be a diversion for the average Chinaman from witnessing the Chinese banking system's impending implosion.  At least the US will get a chance to try out the new littoral combat ships.

yrbmegr's picture

I believe the Navy is not terribly impressed with those new ships.  Unfortunately.

willwork4food's picture

They might be impressed with their new anti-ship missle deplyments.

yrbmegr's picture

It occurs to me perhaps the Navy wants us to think they're not terribly impressed with the new ships.  Perhaps we'll find out soon.

TruthInSunshine's picture

Chinese naval vessels aren't impressive, but they have some bitchin' surface to surface water hugging missile technology posing tactical challenges that the U.S. Military hasn't quite yet cracked, AFAIK.

G.O.O.D's picture

And the chinks bitch about our debt. When this one crashes folks, it is going to  be epic in proportions. Not one nation on earth is going to be immune from this one. Keerrrfvkincrash bitchez

Jack Burton's picture

I never trusted the idea of P2P financing. Sounds great on the surface, but if you are the one handing over the cash, where is your security? Gotta have some collateral to secure your hand over of cash money.

I use P2P in my business, in fact P2P is one of the foundational concepts of how my business works, two people entering into a business transaction outside all formal systems. Your reputation is your everything, lose it, and go out of business in an eye blink. Same for P2P loans, but there, real cash can be lost in an eye blink!

tip e. canoe's picture

perhaps it's that the concepts of p2p and debt do not mix?

FilthyPhil37's picture

If it appears that a break down in outside-the-system P2P procedures were the first shoe cause, then it'll be easy for them to blame it on greedy businessmen like yourself, who use these non-regulated processes to make money. Thus, in the aftermath, they will easily convince their captive audience that what is needed is more regulation, centralised human action and essentially, more status quo.




I can't tell anymore when it's sarcasm or when it's just shrewd political analysis.

WillyGroper's picture

I had to guffaw yesterday when I read one of those horrid 400% payday loan places got robbed.

Robbers robbing the robbers.

Zero Point's picture

If I was a cop taking that call, I'd just chuckle and hang up.

Offthebeach's picture

Heard on the radio a advertisement. Female voice said if you owe 2 or MORE payday loans, they can help you consolidate....

Yep. Economy is great.

Forward liquidity!

nmewn's picture

"China is responsible for $3.6 trillion in loan creation annually..."

Does debt even matter in a communist/socialist state? ;-)

redd_green's picture

CHina, socialist?  Man, you need to get out more.  China is the least socialist country on the effing planet!  No social security of any kind, no unemployment insurance, nothing.   The trillionaires who run the country are quite happy to step over people dying in the streets of some treatable illness they have not money to get treated for.  In China, its all about how much you can streal before you can run away to Canada before they catch you and cut your head off.

krispkritter's picture

Wi Tu Por...(and what's a trirrion amongst friends?)

FreedomGuy's picture

China has indeed learned Western ways very well! They will get the same consequences.

krispkritter's picture

Over One Birrion Served!

(the banking family/cartels and their multi-national corporate entities deserve to die, many times over)

Harbanger's picture

These P2P loans are small compared their CB.  I wouldn't get too excited.  Don't forget the Yuan and dollar are 6:1 when counting trillions. It may look like the Fed has more "assets" right now but when it all breaks, China will be left with most of the wests Gold and Manufacturing base.

new game's picture

is this the swan we have been keepin an eye out for?

or just more digital shitz to off load to a greater fool. and whats to say the china bank cant do a balance sheet act as the shalom does.  whats 3.6 t amougst manipulators? digital store of value...

chump666's picture

And we got Bitcoin ATMs rolling out on corner city blocks. FFS!

lolmao500's picture

All good, the Chicoms will start a war and all will be fixed... people will be forced to buy war bonds... there is your money to replace the bad debt.

starman's picture

Nah people are rich from stock dividends and bond yield returns thus retiring at age 20-30 so the high youth unemployment rate. They need no cars because they have chauffeurs.

JR's picture

How is so-called free trade working out for everybody?

The multinationalist-lobbied U.S. Congress told the American people that it was in their best interest to have millions of their middle class jobs (50,000 a month since China was admitted to the WTO in 2001) moved to Red China and Mexico – devastating the United States’ industrial manufacturing base.

Now both the US and Red China are self destructing and one-third of Mexico’s population has flooded into the US as individual entrepreneurs in the latter run up against Communist companies working within the government monopoly.

“Globalism is a wrecking force of amazing power to wreck.” – Paul Craig Roberts

Mempo of Twilight's picture

Free trade is state suicide, there is no faster way to destroy a people then to force them to take advantage of each other to survive.

  1. Outsourcing causes lower wages and fewer jobs, meaning less money to spend 
  2. With less money to spend, the average consumer ditches local products and prefer cheaper ones produced overseas
  3. Reduced demand for local products foreces them to outsource their production or reduce wages, thus re-enforcing (1) and (2)

When the states are all dead, there will finally be room for a world government, mission accomplished.

Pseudonymous's picture

There is not a word in what you just said that has any worth. I don't know where to start.

gwar5's picture

Wow, for a minute there I thought the headline said 90% of loans are expected to default....


TruthInSunshine's picture

Leverage = terminal cancer when the current flows in wrong direction

majalkitta's picture

Just had a look at Chinese stocks and wow, is the market there up or what.

That's a very strong opening for the week. Recently the best play has been to read zerohedge and bet against all news and expectations/predictions. Keep up the good work guys, sooner or later you will be right (we know you are) but the wait has been long. Reminds me of Van Gogh. 

holdbuysell's picture

I'll SPECULATE on that debt at a price of USD0.001 per.

And not a tenth of a cent more.

The fireworks will be amazing.

TruthInSunshine's picture

Jim Chanos has Soros beat by 3 years, at least.

In fact, me thinks Soros is cribbin' Chanos' notes.

besnook's picture

if the chinese seconomy collapses(it won't any time soon) the chinese will fight, kill a few .gov employees and employers, force .gov to make labor and business concessions then go back to making money. if the west collapses it will be mad max with .gov in civil war with the people.