China's super-bus exposes dark side of P2P lending

It looked like the future: a wide, elevated Chinese bus that would speed atop tracks straddling the road while multiple lanes of traffic flowed below. And the future looked surprisingly near. Early this month, a prototype of the Transit Elevated Bus - or TEB - was tested in northern China.

Just as international excitement began to build, however, the TEB story went off the rails. According to China's state media organs, previously big boosters of the project, the TEB was little more than a publicity stunt - one of dozens of peer-to-peer (P2P) scams that have duped Chinese investors in recent years by promising unreal annual returns.

The bus bust has thus become a symbol of a different - and far more damaging - kind of Chinese ingenuity. The TEB's promoters promised investors 12 per cent returns on their money, despite the fact that the prototype bus couldn't clear most urban bridges and wasn't tall enough to accommodate most vehicles underneath it. They could get away with it in part because those numbers are par for the course in China's P2P lending industry, which averaged returns of 13.3 per cent last year.

Demand for such loans has exploded in recent years, growing in volume from US$4.3 billion (S$5.8 billion) in 2013 to US$71 billion last year. The appeal is twofold. First, China's big state-owned banks have traditionally focused their attention on other companies in the state sector at the expense of consumers and small businesses. A budding entrepreneur, or a young couple looking to pay for a wedding, often had to rely on the goodwill and deeper pockets of friends and family, loan sharks or, more recently, unregulated "shadow" lenders that specialised in expensive, short-term loans.

Meanwhile, cash-rich Chinese are anxious to find yields higher than the anaemic rates paid by China's state banks, which typically fall below 3 per cent. China's dodgy stock markets aren't a terribly appealing alternative, while the attractiveness of its real estate varies by region. In big cities where property can still produce good returns, the price of entry is often too rich for China's middle classes. And for retirees looking for little more than a steady income, it's too much of a gamble.

On the surface, P2P products seem like a tantalising investment alternative, especially when they're linked to glitzy projects such as high-end real estate or futuristic, road-straddling buses. But as far too many investors have learnt in recent years, the opportunities for abuse are rife. In those cases, P2P might be better described as peer-to-Ponzi.

Late last year, China's top banking regulator warned that over 1,000 of the country's P2P lenders were "problematic". Not long afterwards, Ezubo, one of the biggest, collapsed, taking US$7.6 billion invested by 900,000 Chinese with it.

The idea for an elevated bus was cooked up long before online P2P. In 2010, its inventor claimed it was about to undergo a much-touted trial in Beijing. That was cancelled amid doubts about the technology and the integrity of the people behind it.

Lacking funds, the TEB disappeared until the technology was acquired last year by Mr Bai Zhiming, a property developer with no background in mass transit. He resuscitated the project using a P2P lending platform - Huaying Kailai - that raised US$26 million, promising high returns. According to an executive at Huaying Kailai, at least 200 investors have asked for refunds.

As such scandals spread, the potential for a backlash among angry investors has Chinese leaders worried. Earlier this year, the government began demanding that local officials shut down retail P2P storefronts and suspend registration of companies with finance-related names.

Ultimately, officials in Beijing are going to have to bring to bear the kind of regulatory firepower they already apply to the state-owned banking sector.

That'll erode some of the dynamism that's made Chinese P2P lending so attractive, not to mention bring down those ludicrous returns. Some innovations, though, can ride too high.

BLOOMBERG

A version of this article appeared in the print edition of The Straits Times on August 26, 2016, with the headline 'China's super-bus exposes dark side of P2P lending'. Print Edition | Subscribe