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What Actually Went Wrong with China’s P2P Lending Economy

The P2P lending economy of China was hailed as being one of the best things that ever happened to the economy as investment options diversified, and loans were made available for even those who couldn’t afford what the major banks were offering. The prospect of lending beyond the borders and strict constraints of banking regulations had the P2P market booming like never before, with over 3,383 platforms emerging in the landscape over the course of 10 years. Over time, the monthly transactions associated with these platforms blossomed to over 130 billion RMB, a sheer sign of the heights to which the P2P lending paradigm had reached. Three core reasons were attributed to the meteoric rise of P2P lending in China during its golden years, namely the increasing financial demands of the Chinese SMEs, an overwhelming increase in available funds on the part of investors, and an improvement in the penetration rate of the Internet in the country.

The Rise of P2P in China

The ease, as well as the high-return profile of P2P investments, made it a tempting option for many consumers, especially since the average interest rate in the P2P landscape was close to 8-12%, compared to the mere 2.75% interest rate that was being offered by most regional banks. The preference towards large, state-owned enterprises and companies that major banks exercised had also resulted in a large divide between the giants and the smaller businesses in the economy, the latter which, in turn, jumped at the possibility of an alternative, cheaper, and more accessible investment option. At the same time, the degree of the impetus given to individuals in the Chinese economy, as far as lending goes, has been considerably low, with only about 30% of investment options being directed towards individual consumer endeavors, the other part solely being reserved for high-profile corporate activities.

However, somewhere along the line, things changed considerably.

The Arduous Fall from Grace

The darkness crept in somewhere during the year 2018 when the rates of defaulting and the incidence of fra ...

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