Shanghai P2P Lender Raided After Failing to Make Payments

(Beijing) — Police raided the Shanghai offices of a major peer-to-peer (P2P) lending platform operator on Tuesday and arrested five people on suspicion of illegal fundraising, nearly half a year after the company stopped paying returns to its investors.

The raid also saw police seize documents from the offices of Shanghai Kuailu Investment Group, after being tipped off by investors using two of the company's wealth management platforms, sources with knowledge of the matter told Caixin.

Police said they will urge the company to meet its financial obligations, but didn't say whether criminal charges will be filed.

Kuailu is one of thousands of fast-growing P2P financing companies that are part of the backbone of China's booming but only lightly regulated shadow banking industry. Such firms often raise money by promising big returns, even though their mom-and-pop investors often have little understanding of where their funds are going.

The companies then plow money into a wide range of assets, many with high-risk profiles, such as film production and real estate development. When such investments fail or don't produce the promised returns, the P2P lenders often can't meet their financial obligations, leaving investors empty-handed.

Beijing worries about the rapid proliferation of such platforms and the big risk they pose to unsophisticated investors who sometimes trust such companies with their life savings. Regulators have taken recent steps to close down problematic companies and provide tighter oversight of the broader sector.

Kuailu is a typical case, promising investors 10 percent annualized returns, far higher than they could get from traditional banking products. Founded in 2003, the company entered P2P lending in 2014. It found a niche in lending for film production in both China and Hollywood using connections of its then-chairman, Shi Jianxiang.

In the past two years alone, Kuailu raised about 14 billion yuan ($2.1 billion) from about 260,000 investors, and poured the money into such high-profile projects as the Hollywood film The Bombing starring Bruce Willis.

But the company ran into financial difficulties and stopped paying out returns about six months ago, around the same time that Shi resigned, citing health concerns.

In June, Kuailu promised at least 600 investors, most of them elderly and in urgent need of cash, that they would receive priority in getting back 5 to 20 percent of their principal, a pledge requiring up to 100 million yuan, according to a notice on its official account on the popular WeChat mobile instant messaging platform.

Some investors complained they received far less — in some cases just 5,000 yuan from a 300,000-yuan investment.

The company's new chairman previously said Kuailu would start to fully repay its investors starting Oct. 1, after disposing of some assets. But he resigned in mid-August, and some investors worry that little progress has been made as the deadline approaches.

Contact the reporter Dong Tongjian at (tongjiandong@caixin.com), and the editor Doug Young at (dougyoung@caixin.com)