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P2P Collapse in China To Be Felt Across Different Industries

Aug 3, 2018 by A. Alfaro
P2P Collapse in China To Be Felt Across Different Industries

In April this year, the China government unleashed a tighter set of regulations for the country’s P2P lending firms to curb the growing number of financial scams in the sector.

The move came as a thunderclap for several players of the USD 190 billion sector and more than 200 P2P lending platforms have closed down in the last two months while thousands of others expect the worst.

According to the new rules, companies have to comply with stricter capital requirements and cannot lend more than USD 30,000 to individual lenders. The According to the Financial Times, five platforms closed each day during the first three weeks of July. Some companies have just disappeared overnight and its owners fled.

This collapse of the P2P sector has become one of the main headaches of Chinese investors. But the bigger anxiety is that the crisis now threatens to spread send shockwaves beyond these platforms’ immediate circle of investors and threaten to jeopardize businesses in different sectors.

On August 1, the Beijing convenience store chain Linlijia informed its suppliers that the company was to cease all its activities that very same night. In an official letter, the company explained that its only financial backer was being investigated by the Shanghai police. As a result, all his bank accounts had been frozen. Because Linlijia still is in its early stage of development and is unable to make ends meet yet, the company cannot continue to operate on his own. Not only that, Linlijia is unable to get in touch with its financial backer. Its suppliers have Linlijia’s suppliers have already prepared a lawsuit against the convenience store chain. Linlijia has basically declared bankruptcy.

Linlijia was regarded as the Chinese convenience store that was most similar to 7-11. Some of its senior executives actually left 7-11 to found Linlijia. This Beijing convenience store chain already employs more than 1,000 people. But everything changed overnight. Its employees at the 168 stores who were working as usual only a few days ago, now face an uncertain future. And they are not the only ones.

The very same night, Wang Chuyun, founder of the router manufacturer Hiwifi, issued an open letter in which he explained that the company’s cash flow had been interrupted. As a result, the company’s sale channels had been blocked and the whole company was facing a major crisis. According to the data provided by Itjuzi.com, in 2013 and 2014 Hiwifi secured financing from investment firms such as GGV Capital. With a strong financial backup, the company was able to control half of the domestic router market.

But now everything has changed. Suppliers are trying to collect their debts, bills keep mounting and partners are suspending their cooperation. The company is facing a life-or-death crisis, to the extent that every expense, including the salaries for July, must now be covered by the income generated by sales.

According to Wang Chuyun, the shareholders are unable provide funds to solve these problems. In the open letter, Wang Chuyun describes how his own house is a collateral for the company’s debt that already mounts to millions of dollars.

Another company in trouble is a Beijing-based travel agency called Shangpin International (北京尚品国际旅行社). This agency, financially backed by Chunxiao Capital, started to cut staff last April when it faced financial hardships. According to the report by the Travel Business Observatory, the agency is behind on the payment of the last three months’ salaries (USD 727,000). The company has told workers that due to “hardships faced by the company’s investors”, Shangpin International has terminated its labor contracts with them. The company belongs to BTG International Travel &Tours, which belongs to Chunxiao Capital Group.

Although these three examples of companies facing financial difficulties look unrelated, they have a common element: P2P lending.

The P2P lending crisis started on April 4, when the Shanghai Police arrested Zhou Bayun, the legal representative of Shanlin Financial along with seven others. They were accused of misappropriation of funds. At that time, it was reported by local media that Xiang Jianan, the person supervising Linlijia’s operation, had also very close links to Zhou Bayun. Local media discovered that Shanlin Financial P2P services were Linlijia’s main source of financing.

Hiwifi’s story is similar. The company started having financial difficulties when iCaifu, its business partner and one of its main investors, was being investigated for misappropriation of funds. On June 26, iCaifu made a public statement in which the company declared it would stop its investments.

Shangpin International’s difficult situation is also rooted in a loser of the P2P battlefield. The previously mentioned report by the Travel Business Observatory described how a Mister Ma, the assistant vice president of the human resources department of Shangpin International, confessed to an employee earlier this year that Chunxiao Capital’s funding was not guaranteed anymore. The executive explained how two of the seven Chunxiao Capital’s P2P projects had already collapsed and the Shangpin International was doomed.

Other P2P platforms that received investment from Chunxiao Capital such as Niubanjin, Jucaimao and others have either defaulted payments or been investigated by the police.

With the current situation of funding shortage and the collapse of P2P platforms, the companies or projects that depend heavily on this source of funding are likely to face hardships in the short term.

Describing the current situation, Niu Wenwen, the founder of business support solutions provider, Dark Horse Venture said, “The P2P crisis has reached the entrepreneurship field. This is a small scale financial crisis that affects P2P platforms, listed companies, venture capital firms and startups. It can only be fixed by the market, the government will not be able to rescue everyone. Now everybody is afraid: who will be next? Cryptocurrencies? If that also explodes, how far will it spread? It will affect venture capital the most.”

A. Alfaro

A. Alfaro is a Beijing-based freelance reporter. He focuses on China's politics, culture and society. He can be reached at varofaro@gmail.com. 

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