HONG KONG (Reuters Breakingviews) - Chinese peer-to-peer protests are setting a political trap for regulators. Beijing police on Monday stopped irate investors from converging on the head office of China’s banking regulator to demand compensation for losses from collapsed P2P lenders. Officials are partly responsible for the mess, yet a rescue would reinforce moral hazard.
Reformers have tolerated more defaults in recent years, particularly in the shadier corners of the shadow banking industry. Such insolvencies can prompt protesters to assemble outside government offices, claiming they were told the investment was guaranteed. That’s often the case, because many fraudulent schemes use the assurance of state support to part investors from their cash.
The Chinese authorities cannot honour promises made by criminals, and local officials who do so are guilty of fraud themselves. The central government has repeatedly warned that it won’t honour “illegal guarantees”. Chinese investors who insist on believing otherwise are arguably guilty of bad faith.
Even so, the aborted Beijing protest is different. It is not focused on a single product or company, but on the nationwide crisis of China’s P2P industry, which had about $200 billion of outstanding loans in June, according to industry website Wangdaizhijia. More than 200 firms ran into trouble in July alone.
Some were probably frauds, like the $5.5 billion Tangxiaoseng failure in June. But many P2P companies appear to have fallen victim to the regulatory campaign to reduce financial risk. Culling the weakest and shadiest P2P lenders is not an accident but a policy goal. So is convincing retail investors to distrust absurdly high rates of return.
However, many P2P lenders did enjoy tacit or overt local government support as “financial innovators,” including some that listed on stock exchanges. The government also bears responsibility for letting the industry grow so chaotically.
Ambiguity about state support is pervasive in China. It affects wealth management products distributed by banks, bonds issued by local government financing vehicles, and a range of other financial instruments. The danger for regulators is that angry P2P investors start questioning other assets. That would force the authorities to choose between bailing them out – or clamping down even harder.
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