Mainland police are preparing to contain the risks from runaway online private lending as authorities anticipate more scandals and defaults in the middle of this year.
Police have been ordered to
step up efforts to shut down illegal online lending platforms, closely monitor legal operations and act promptly against suspected criminals, according to two Shanghai police officers.
During a teleconference hosted by the Ministry of Public Security last month, senior officials said illegal fundraising schemes were likely to result in a slew of defaults in June as payments fell due.
Police branches were warned to be on alert for social unrest, according to one police source who attended the event.
Liquidity is normally tight midyear as commercial banks compile their interim reports and force clients to repay short-term loans.
“Lots of debt and wealth management products sold online are likely to expire in the middle of this year,” the source said. “Alarm bells are ringing now.”
The warning comes after the collapse of Ezubao, the country’s biggest peer-to-peer online lending platform, which allegedly defrauded about 900,000 investors across the country of more than 50 billion yuan (HK$59 billion). Authorities branded Ezubao a Ponzi scheme and police arrested 21 people over the collapse.
READ MORE: Chinese police swoop on HK$59 billion ‘record-breaking online Ponzi scheme’
The ministry launched an online platform on Saturday to gather information from the public about the case.
Earlier this month, the State Council ordered ministry-level authorities and local governments to be on guard for fallout from private lending.
The alert followed the China Banking Regulatory Commission’s (CBRC) decision in December to bar P2P platforms from raising and lending funds on their own.
Ezubao’s collapse has sparked fears of a credit crisis similar to the collapse of the underground banking system in Wenzhou, Zhejiang province, five years ago when dozens of entrepreneurs committed suicide or fled the country.
P2P businesses have mushroomed since 2013 with the runaway growth of internet finance, services that cover payment, lending and sales of banking and trust products via the internet. P2P lenders are supposed to be matchmakers between lenders and borrowers, but a lack of regulatory oversight resulted in an illegal fundraising spree and loan sharking schemes.
Between late 2014 and mid-2015, about 2 trillion yuan of funds from the grey financing market, mostly from P2P businesses, flowed into the stock market before the boom went bust.
The CBRC said 1,000 mainland-based P2P businesses, or 30 per cent of the total, were ailing operations that needed to go.
READ MORE: China’s HK$59 billion online Ponzi scheme: who started it, how did it happen and now what?
Gregory Gibb, chairman of the Shanghai Lujiazui International Financial Asset Exchange, which operates P2P platform Lu.com, said growing suspicions about the sector were well founded because a huge number of platforms failed to set up an efficient risk management system.
“It will take a long time before the P2P market finds a sustainable growth model,” Gibb said. “We believe the mainland’s internet finance sector has entered into a phase when rectifications are much needed.”
He said Lu.com, a subsidiary of Ping An Insurance, was diversifying into wealth management.
Mainland leaders have made financial stability a priority, with fears that thousands of victims could take to the streets to protest against regulators’ inertia.
The mainland’s insurance regulator has also sought to ward off risks by barring insurers from selling policies or investing through questionable P2P platforms.
The China Insurance Regulatory Commission said questionable P2P players were those that raised funds on their own before offering loans to clients.