SHANGHAI/BEIJING (Reuters) - China’s unregulated peer-to-peer (P2P) online lending sector looks set to see more companies falling into difficulties, as greater scrutiny and a slowing economy take their toll on aggressive lenders.
Ezubao, China’s largest P2P platform by lending figures, is being investigated for suspected illegal business activities, the official Xinhua news agency reported on Tuesday.
The P2P lender had lent 70 billion yuan ($11 billion) and counts Bank of China Ltd 601988.SS3988.HK, the country's fourth-biggest lender, as its major creditor, local financial magazine Caixin reported.
Ezubao’s offices in Beijing and Shenzhen were closed by police earlier this month, an investor told Reuters.
Reuters couldn’t reach Ezubao for comment. Bank of China didn’t immediately respond to a request for comment.
Police have frozen 1.1 billion yuan of risk reserve deposits in a China CITIC Bank account owned by a financial leasing company linked to Ezubao, the bank told Reuters.
Investors went to social media to voice their dismay after Ezubao halted cash withdraws on Tuesday night.
“I invested 100,000 yuan in Ezubao, due to mature in July next year,” said a woman surnamed Xie on social networking site Weibo. “One of my younger sisters also invested 460,000 yuan ... It’s all drifted away like water.”
China’s more than 3,500 P2P firms have been dogged by reports of fraud in recent years.
“There are a number (of P2P firms) that police are going after, so be ready,” said the co-founder of one leading Chinese P2P company, who declined to be named because of the sensitivity of the matter. More cases will be exposed in the run-up to and after new regulations on P2P lending are introduced, he said.
A pivot by banks away from riskier small- and medium-sized enterprises (SMEs) amid a slowing economy has led to a growing customer base for P2P companies, which have flourished in China’s unregulated environment.
The sector is now worth 133.1 billion yuan ($21 billion), according to industry data provider Wangdaizhijia.
But as the country’s SMEs face tough business conditions and rising defaults, the number of P2P closures is also swelling.
Some 824 P2P platforms had shuttered between the start of the year and Dec. 10, an almost 300 percent increase from the year before. Of that number, more than 50 percent were due to runaway bosses, according to Wangdaizhijia.
Long-awaited industry-wide regulations to be released by the China banking regulator will uncover widespread illegal behavior, some experts say.
“Internet finance is still finance,” said a central bank opinion piece published on the Chinese government website in July. “It doesn’t make the sector less vulnerable to hidden risks, contagion, widespread and unexpected characteristics.”
Reporting by Engen Tham in Shanghai and Shu Zhang in Beijing; Editing by David Holmes
Our Standards: The Thomson Reuters Trust Principles.