Thursday, 27 December 2018


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Shanghai office worker Jin Linglan had just put a downpayment on a car when she realised her savings were gone. Like many prosperous Chinese, Ms Jin invested in financial products that promised a high rate of return. And, like many of her fellow investors, she has made the painful discovery that her money has been swallowed up by the recurring defaults in China’s shadow banking market. The losses absorbed by middle class families in a nation famous for its diligent savers have taken a quiet financial and emotional toll. Many of the failures have been peer-to-peer lending platforms. Outstanding peer-to-peer loans in China topped Rmb1.2tn ($174bn) in the first quarter this year, before sliding to about Rmb800bn as hundreds of peer-to-peer platforms shut, according to a report on the sector by Moody’s. It all means that Ms Jin will not be able to buy that car. An online consumer lending company that went bust in July took with it about $90,000 of her money. “It was everything I had saved since college,” she said. “I told my dad about this but we decided not to tell my mum. We were afraid she could not accept it.” Investors interviewed by the Financial Times revealed tales of damage to personal relationships as well as pocketbooks. One retiree of modest means lost about Rmb200,000 she had hoped to give her daughter and British son-in-law to renovate their new home abroad. Another woman made a decision not to be angry at her husband, after he lost the equivalent of two of her past seven years’ salary. A senior manager at the Beijing office of a large US tech company did not want his boss to know he spent his vacation days protesting outside government offices. It is difficult to put exact figures on the size China’s shadow banking sector, which attracts individual and corporate savings with interest rates above the savings deposit rate and lends the money on at even higher rates. Shadow banking institutions involve not just peer-to-peer platforms, but trust companies selling wealth management products, online fintech companies, pawnshops and a large variety of informal money lenders. What is certain is that the sector has seen a lot of growth.  About 169m Chinese, or about 12 per cent of the population, have invested in wealth management products online, a rise of 66 per cent from two years ago, according to a Moody’s report published this month. Essentially, they are putting money into the shadow banking system. Other statistics cited by Moody’s also indicate that money under management by peer-to-peer platforms has doubled in the past two to three years. The sharp rise in online investing reflects “a desire to generate returns above cash-deposit rates”, it said.  Individuals and companies with savings — including state-owned enterprises and some foreign invested businesses — lend into the non-bank financing market. On the borrowing side are small businesses that are poorly served by the formal banks, individuals without credit cards and larger enterprises that have exhausted their ability to borrow from state-owned banks. Not all borrowers are small. Finance-to-aviation conglomerate HNA raised billions through peer-to-peer platforms and other non-bank funding channels, a Financial Times analysis showed. In August, amid a rise in peer-to-peer shutdowns, it failed to make payments to a swath of individual investors, including some of its own employees. Recommended FT Transform China faces peer-to-peer lending scandals dilemma The Chinese government was first alerted to the risks posed by shadow banking during a spate of failures in 2015, following a series of noisy protests and even citizen arrests by middle class investors. In April 2017, Chinese president Xi Jinping declared that “financial security is an important part of national security”. The government became more wary about protests after that. Police even locked down Beijing’s financial district in August after the rise in peer-to-peer shutdowns in July. Most of China’s more comfortable middle class citizens would rather swallow their losses than risk arrest. Instead of protests, the reckoning this year has taken the form of belt-tightening and painful family conversations. He Weitao, a 25-year-old employee at a respected high-tech company in Shenzhen, discovered his parents were surprisingly understanding when he confessed that he had lost one-third of his annual salary after he invested it in an online lending company to get better returns. He was still young, they said, and could earn the money again.  “At first I was very passionate about chasing down my money but there has been no progress for months,” said Mr He. “What can I do? I have to focus on my life, work hard and not let it get to me too much.”

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