Not too long ago, we voiced concerns about the increasingly popular concept ‘crowdfunding’ (also known as peer-to-peer or P2P lending). In short, peer-to-peer lending involves members of the public depositing funds with an online platform, which in turn pools these funds to make loans. These loans may be used for a variety of purposes, such as to finance a real estate purchase, pay for home improvements, consolidate debts, and so on.

Unfortunately, such platforms present enormous risk to investors for a variety of reasons. Chief among them is the fact that the first priority for platform owners is… the platforms themselves. The greater your investment volume, the more likely it is that you can sell it off for a sizeable profit and wash your hands of any potential fallout. This encourages these platforms to extend loans higher risk individuals, heightening the likelihood that investors won’t get their principal investment back, let alone see a return.

P2P lending has been immensely popular in China, but the industry has been racked by fraud and government shutdowns.

While peer-to-peer lending has gained traction in Western markets, it took off like wildfire in China. In the last few years, more than 6,000 P2P lending platforms launched in China. In 2017, the country’s P2P lending industry had reportedly recorded transactions totaling $445 billion.

However, many of these began to falter quickly. In response, the Chinese government has moved to significantly to impose regulations on what had been a largely oversight-free industry. Ezubao, a lending platform which had raised nearly $8 billion in funds, was shut down in 2016 when regulators discovered that the firm was actually an elaborate Ponzi scheme.

Ding Ning - Owner and Chairman of Ezubao
Ding Ning, owner and chairman of Ezubao, in an interview with China Central Television.

The firm’s chairman, Ding Ning, was shown to have spent $150 million in investment funds on cars, real estate, and a variety of luxury items. He was convicted on charges of fraud and smuggling, and given a life sentence in 2017.

Other prominent platforms in the country have failed, albeit in less spectacular fashions. Hongling Capital, one of the oldest and largest peer-to-peer lenders in China, announced its intention to exit the market in July of 2017 in the face of new regulations it could not comply with. By February of 2018, the field had been winnowed down to fewer than 2,000 lending platforms, one-third the high-water mark.

A new wave of regulations in 2018, implementing a ‘record filing’ system, was expected to wreak havoc on the country’s peer-to-peer lending industry.

In the second quarter of 2018, the industry braced for more trouble, as China announced the rollout of a new licensing system for P2P lenders. Amongst the new set of regulations were requirements that lenders had to use custodial banks, could not extend loans of more than $159,000 to individual borrowers, and could not guarantee interest.

But a key part of the regulations was a new ‘record filing system’ that would go into effect in April of 2018. Highlighting the somewhat absurd nature of the P2P lending industry—and its relationship with the Chinese government—lenders reportedly didn’t know how the record filing system operated.

Said a P2P lender quoted by the Financial Times, “The record filing process is a very important step towards standardisation, and it is incredibly complicated, but I am not clear on what the process is.”

Many feared that the regulations and the confusion surrounding them could lead to another round of platform failures. As it turned out, those fears were prescient.

In May 2018, peer-to-peer lenders began to close their doors en masse, leaving their investors in the cold.

In May, 10 P2P lenders closed their doors. In June, that number spiked to 80, with the businesses closing up shop due to issues with liquidity. As it turned out, China was even more aggressive in its clampdown than had been anticipated, with the funds of many lending platforms being frozen.

Bloomberg reported that panicked investors were rushing to withdraw their investments, with some showing up in the offices of lending platform operators. One lender,, shut down in response to what it described as “spreading panic among investors.” 57 lenders ceased operations or failed in the first half of July.

Those who have seen their savings devastated run the gamut from young entrepreneurs to retirees. And the outlook for repayment is poor. According to the Shenzhen Internet Financial Association, in past cases of P2P fraud, investors have typically recovered about 20% of their original investment.

The troubles in China are an object lesson to would-be micro-investors—be wary of online lending platforms here in the United States.

The chaotic state of the P2P lending market in China was in large part exacerbated by the government’s failure to rein it in while the industry was gaining steam. However, there were warning signs that investors should have considered.

In June, the chairman of the China Banking and Insurance Regulatory Commission, Guo Shuqing, issued a statement in which he warned investors to carefully consider the returns promised by P2P investment platforms. According to Guo, “Returns above 6 percent should be questioned, those exceeding 8 percent are very dangerous, and those higher than 10 percent will lead to full loss of principal.”

The average reported yield on Chinese P2P loans? 10.2%, according to official figures.

While P2P lending and real estate crowdfunding sites here in the United States have not experienced nearly the amount of upheaval seen in China, Guo’s warning still rings true here. As we have noted, the primary goal of these platforms is to grow in scale. Consequently, the security of investors is placed at risk.

If you’re still hard set on considering this unproven industry, do your due diligence. Research the experience of those who have invested in platforms you’re interested in, see how they have done over a period of several years, and gauge the overall health of the platform. And please, minimize your exposure. These are not investment vehicles in which to place a significant percentage of your savings.

On the other hand, if you would like to learn how you can earn a monthly return on your investment by investing in real estate mortgage pools, we can help. Contact Socotra Capital today by calling 855-889-7626, or send us a message using our contact form.