Back in 2006, I was among the first group of investors who pumped money into Prosper.com, the pioneer in person-to-person lending in the States. It didn't end up pretty -- my $15K investment turned into a loss exceeding $1,000 due to high number of delinquencies and charge-offs among the 160 loans I invested in.
On the other side of the Pacific, P2P lending is much less regulated in China. One can set up a new P2P lending site by merely registering a business and setting up a web site. In 2013, there were over three dozen such sites closing down for good and many investors losing their shirts along the way. Before they collapsed, they often boasted interest rate exceeding 40%.
My experience in the last few years in P2P lending in China, however, were more successful.
P2P lending exists in very different modalities in China. Here are the several major business models and representative P2P lending sites I tried.
The first model is very close to Prosper or LendingClub, where the site exists as a broker of P2P lending but doesn't offer any promise of returns. The leading company is Paipaidai, which started in 2007. Much like its U.S. counterparts, Paipaidai facilitates online lending by performing credit check on borrowers. Investors can put as small as $5 to loans with interest rate ranging from 8% to 24% and duration of 1 month to over a year. All in all, I invested a total $14,000 over the course of 11 months with an average interest rate of 12% and a duration of 3 months. Total interest earned after charge-off: $220.
The second model is more common in China, whereby P2P lending sites offer explicit principal guarantee for each loan they broker. The one I tried is Hong Ling, which started its operation in 2009 and is among the top three P2P lending sites by volume. It brokers loans from 3 days to 3 years with interest rate ranging from 0.01% per day to 24% per annum. I once had over $160,000 invested at this place -- I even wrote a small program to help me automatically bidding in new loans to make sure I can snipe at the loans with most attractive terms. I tracked a total interest of $9,000 over 10 months with an average balance of $70,000 and the annualized return of 15% was pretty juicy.
Alarmed by recurring news of P2P lending site collapses, I moved my money to Lufax. Lufax is operated by Ping An, one of the top three insurance firms in China and a Fortune 500 company with a market capitalization of US$50B. As Ping An's online beachfront, Lufax acquires investors by guaranteeing three-year P2P loans at an interest rate of 8.61% (tied to a key interest rate in China). At the same time, it charges borrowers 2% per month for the guarantee service, which means borrowers pay an effective rate of over 30% for personal loans. Thanks to its strong brand recognition and market reach, Lufax is able to generate daily lending volume exceeding $5M consistently, making it one of the top three P2P lending sites in China. While the 8.61% interest rate is dwarfed by Hong Ling and alike, Lufax gives me the peace of mind I need where I live half a world away that I'm comfortably entrusting it with over half a million in US dollars these days. Also, Lufax provides some liquidity by allowing loans held for over 2 months to be able to trade thru its web site.
The 8%+ return makes me think: is there carry trade opportunity by borrowing in US dollars and investing in such minimal-risk vehicles in Chinese Yuan? I'm working on a few angles which I will share soon in this blog. Stay tuned.