Chinese P2P lender proves to be pyramid scheme

BOFIT Viikkokatsaus / BOFIT Weekly Review 2016/05

Prior to its collapse last week, the peer-to-peer (P2P) lending service Ezubao, which was only founded in summer 2014, managed to accumulate assets worth 50 billion yuan (€7 billion) from nearly a million Chinese investors on the promise of 9–15 % returns. As in a classic Ponzi scheme, there were almost no real investment targets. Money from late investors was used to pay early investors and the company’s founder and other key personnel took their share of the money raised. Government investigators have yet to determine how much money has been permanently swindled from investors and how much can be recovered.

The availability of P2P lending services exploded last year. An investor survey found that P2P loans, due to their “guaranteed” high returns, were the number-three favourite form of investment in China. By some estimates, the P2P lending market rose last year to nearly 1 trillion yuan (€140 billion) or about four times the 2014 amount. Regulations for the P2P lending industry are still in drafting phase.

As the number of loosely or not at all regulated financial vehicles has soared in recent years, the number of financial abuses has grown and new fraud cases will surface.

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