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China Peer-to-Peer Loan Sites Fail as Fraud Climbs, Xinhua Says

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Jan. 13 (Bloomberg) -- Some Chinese peer-to-peer lending websites collapsed last year and others may need restructuring in 2014 to curb fraud in an industry that has grown rapidly with little regulatory oversight, Xinhua News Agency said.

About 800 such online operations emerged in China just last year with outstanding loans of 26.8 billion yuan ($4.4 billion), Xinhua reported, citing industry data from Wangdaizhijia.com, China’s biggest peer-to-peer lending site. Meanwhile, 74 websites were either shut down or their users were unable to withdraw cash, according to the report.

Peer-to-peer lending has taken off in China since 2011 as traditional methods of private lending among family and acquaintances, part of the country’s unregulated $6 trillion shadow-banking system, move online. Loans brokered on the Web increased to 105.8 billion yuan last year from 20 billion yuan in 2012, Xinhua said.

Akin to LendingClub.com or Prosper.com in the U.S., China’s peer-to-peer lenders let individuals invest a minimum of 50 yuan in projects ranging from small-business expansion to funding newlyweds’ honeymoons with interest rates capped at 24 percent, the highest allowed under Chinese law.

The average lending rate on peer-to-peer sites was 19.7 percent, Xinhua reported, citing Wangdaizhijia. That compared with the benchmark one-year lending rate of 6 percent.

Liu Shiyu, deputy governor of the People’s Bank of China, in December urged people to recognize the risks associated with online financing and to be wary of fraud. He said peer-to-peer operations aren’t allowed to raise funds for lending or to attract deposits, and they’re also banned from operating an asset pool.

China’s Cabinet is imposing new controls on shadow banking with an order that targets off-the-books loans and shores up enforcement of current rules, people familiar with the matter said last week. The directive reflects concern at the highest levels of government that shadow banking, estimated by JPMorgan Chase & Co. at 69 percent of China’s 2012 gross domestic product, may threaten the financial system’s stability.

To contact Bloomberg News staff for this story: Jun Luo in Shanghai at jluo6@bloomberg.net

To contact the editor responsible for this story: Chitra Somayaji at csomayaji@bloomberg.net

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