People use automated teller machines (ATMs) in Beijing, China, on Tuesday, Jan. 19, 2016. China's economy slowed in December, capping the weakest quarter of growth since the 2009 global recession, as the Communist leadership struggles to manage a transition to consumer-led expansion. Photographer: Qilai Shen/Bloomberg
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China’s unruly peer-to-peer lending — the focus of 21 arrests of people involved in “a complete Ponzi scheme” — ballooned in size last year as credit-starved private companies paid swingeing interest rates to secure loans.

Lending by P2P institutions rose by Rmb982bn ($149bn) last year, up from the Rmb253bn that was lent out in 2014, according to industry data compiled by Wind Information, a Chinese data company. However, because most P2P loans are repaid quickly, the value of total loans outstanding at the end of last year was only Rmb439.5bn, Wind data show.

CHART: China's P2P lending market has been ballooning

These numbers mean that while P2P lending was one of the fastest-growing segments in China’s financial system last year, it remained a relatively minor contributor to overall credit expansion. Total social financing, the widest official measure of credit, eased 7 per cent year on year in 2015 to a total of Rmb15.3tn ($2.3tn). Some Rmb11.3tn of this total came in the form of bank loans.

Nevertheless, the fallout from the P2P crackdown could be considerable. Xinhua, the state news agency, said that Ezubao, a company it charged with running a “Ponzi scheme”, had offered mostly fake investment products to nearly 1m investors, enticing them with promises of annual returns of up to 15 per cent. Ezubao allegedly took more than Rmb50bn from investors, Xinhua said.

It was not clear whether authorities would now move against other P2P platforms, a possibility implicit in a statement by the ruling Communist party at its annual Central Economic Work Conference in December last year that “excesses” in online lending were a threat to financial stability.

The nature of P2P lending is such that it tends to flow to the most vulnerable borrowers in the economy. A sales executive at Yixiang Gaoyi, a P2P lender in the northeastern city of Tianjin, said his company lent to small and medium-sized enterprises which needed money quickly but were cold shouldered by banks.

“They need the money for things like making up short-term financing shortfalls when, for example, they have a building to finish off and they need just one last dollop of cash,” said the executive, who declined to give his name, by telephone from Tianjin.

The lender’s rate card showed that it offers investors an annual 15 per cent return on sums of more than Rmb50,000. Asked what sort of risk such a high rate of return implied, the executive said: “Listen my friend, all our products come with zero risk. This is very stable business.”

The popularity of P2P lenders surged last year partly because returns available from mainstream “wealth management products” (WMPs) offered by state-owned banks plunged to an average of 4.4 per cent from a peak of 5.6 per cent at the end of 2014, Wind data show.

For many urban residents, WMPs issued by state banks represent the most attractive low-risk investments available at a time when bank deposits are offering an annual 1.75 per cent.

But an average WMP return of 4.4 per cent means, in real terms, that savers lose money. This is because the official Consumer Price index, which showed an increase of 1.6 per cent in December, understates urban inflationary pressures by a significant margin because it does not adequately reflect rises in rent, healthcare and education costs.

A cost of living survey of residents in more than 100 cities, conducted by FT Confidential Research, shows that living costs have in fact been rising at around 6 per cent year on year for most of the last year.

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