Jul 24, 2019 11:56 AM

Shock Lufax Revelation Spotlights Slow Death of P2P Lending

I was getting ready to leave work last Friday, all set for the weekend, when our finance team leader told me about a late-breaking story he was preparing to write. The news was simple, but also quite a surprise for someone like me who has followed a young group of privately owned financial technology, or “fintech,” companies that have emerged over the last six or seven years.

Word was that Lufax, the Shanghai-based company that was one of the earliest arrivals to the space, was weighing getting out of the peer-to-peer, or P2P, lending business.

“Um, isn’t P2P Lufax’s main business?” I asked my colleague.

A few brief words later I confirmed that the once-unthinkable was indeed happening, and Lufax was strongly weighing shedding its core business. There’s quite a bit of backstory here that I’ll review shortly, along with my own interpretation and those from my handful of contacts who are quite knowledgeable on this group.

But the big-picture bottom line is one that many of us who have worked in the China high-tech space over the years are all too familiar with. When it comes to doing business in China’s high-tech realm, both investors and entrepreneurs, domestic and foreign alike, often have unrealistic expectations of what they can achieve.

I’ll call it the China Kool-Aid effect. For those unfamiliar with the sugary drink that was quite popular in America in the 1970s and ‘80s, the expression “to drink the Kool-Aid” refers to uncritically adopting a belief or going along with something risky due to peer pressure. There’s the heavy connotation that the new world view is way out of sync with the way things really are.

In my years of covering China tech, I’ve seen time and again how people with little or no experience will suddenly plow all their effort and resources into a new greenfield area, always with big dollar signs in their eyes. Failure is inevitable 99.9% of the time, but that never seems to deter anyone. Investors are equally susceptible, often pumping millions or even billions of dollars into high-tech products and services without a serious business model.

Shared bicycles is probably the best-known most recent case, and has resulted in hundreds of millions of dollars in lost investment and left the streets and makeshift junkyards of China filled with huge numbers of broken, discarded bikes gathering dust and rust.

P2P dream

In the case of Lufax, the elixir that provided the China Kool-Aid was the P2P lending business model. The model is pretty simple, and actually dates back to the much older P2P music-sharing service pioneered by Napster in the 1990s in the U.S. But rather than sharing music, the P2P lending model paired people with money, often mom-and-pop types, with companies and other organizations looking for loans.

In order to attract that money, the P2P operators would have to offer interest rates significantly higher than banks, since otherwise the mom-and-pops would just park their money at the nearest state-run lender. That’s where the problems began, since many of these P2P platform operators were quite inexperienced at dealing with risk, and frequently parked the money in high-risk ventures that were unable to make the unrealistically high interest payments.

You can see the recipe for disaster, and that scenario has played out time and again over the last four or five years, most notably in the spectacular failure of a P2P lender named Ezubao back in 2016. As one of my sources who works at one of these companies nicely put it, this entire business model was built on a mismatch of expectations from mom-and-pop investors and what borrowers seeking their money could reasonably afford.

China’s regulator has come to realize the reality here, and has been slowly clamping down on the industry, quite possibly with an eye to stamping it out altogether.

All of this brings us back to Lufax, and its somewhat shock decision to consider dropping P2P lending. As I’ve said previously, Lufax was one of the earliest players and has a relative pedigree in its backing by insurance giant Ping An. The company was also the earliest major P2P lender to chase an IPO, with word of such a plan surfacing as early as late 2016. But that plan was repeatedly delayed for unspecified reasons.

Now the latest reports are pointing out that Lufax’s core P2P lending business model may be the biggest factor behind the delay due to all the uncertainty surrounding the model. Several of my sources say the solution to the mess, which is already happening industry-wide, is to dump the mom-and-pops and replace them with more sophisticated institutional investors as the main source of funds for this new generation of lenders.

Such an approach does seem quite logical, assuming you’re big and well-connected enough to find such funding sources. That’s where an interesting opportunity could lie for savvy investors. Of the many P2P companies to list overseas these last two years, many have made the transition away from P2P already or are in the process of doing that. And yet their values remain quite depressed.

Four of the largest — Qudian, Ppdai, Lexin and Yirendai — are all listed in the U.S. and have valuations that look mostly quite pathetic. Qudian and Ppdai lead that group, both now trading about two-thirds below their IPO prices. Qudian also trades at an equally anemic price-to-earnings (PE) ratio of just 7.5.

Yirendai and Lexin actually trade modestly above their IPO prices. But again, neither has a PE to crow about, with Yirendai’s looking even more anemic than Qudian at a meager PE of 4.3 — a level usually reserved for stodgier, slow- or no-growth companies like electric utilities.

At the end of the day, I suspect there could be some good buying opportunities for investors willing to take some risk. That will require some spadework to figure out how much these companies are exposed to the P2P model and what progress they’re making in moving to something more sustainable. As to Lufax, it does seem like the company is probably also in the process of jettisoning this model, which means it could also make it an interesting play when it finally makes its long-delayed IPO.

Doug Young has lived in Greater China for two decades, including a 10-year stint at Reuters, where he led China corporate news coverage. Send your questions or comments to

Register to read this article for free.
Share this article
Open WeChat and scan the QR code