Finance

Nisha Gopalan is a Bloomberg Gadfly columnist covering deals and banking. She previously worked for the Wall Street Journal and Dow Jones as an editor and a reporter.

There have probably been better weeks to be a Chinese peer-to-peer lender -- particularly if you're planning a $5 billion IPO that's likely to be among Asia's biggest this year.

That may be the thought running through the heads of executives at Lufax, the world's most valuable financial startup, after authorities swooped on a rival operator at the weekend and accused it of running a Ponzi scheme that had defrauded 900,000 investors of $7.6 billion.

The lurid revelations surrounding Ezubao didn't do much for the image of the P2P sector. Ding Ning, its 34-year-old founder, used the company's capital to buy a 12 million yuan ($1.8 million) pink diamond ring and a 130 million yuan villa in Singapore, according to the official Xinhua news agency. Police had to use two excavators to uncover about 1,200 account books that had been buried underground. A senior manager was quoted as saying 95 percent of the company's projects were fake.

So time to scrub Lufax off the list of potential investments and forget the online lending industry, at least for a while? Perhaps not.

While the extent and brazenness of the abuse may scare some customers away, cases such as Ezubao are also evidence that Beijing regulators are getting to grips with the P2P market's Wild West extremes. In the long run, the well managed and reputable will thrive.

China began regulating the world's largest P2P market only two months ago. In January, industry researcher Wangdaizhijia said that 1,672 firms, or almost a third of the more than 4,639 total, were ``problematic." The China Banking Regulatory Commission has banned firms from mixing their own money in the general pool of loan funds (a strategy that had juiced returns at some lenders), guaranteeing yields (promised by many sites in China, unlike in the U.S.) or selling high-return trust and wealth management products.

Growing Pains
A rising number of Chinese online lenders are running into trouble
Source: Moody's Investors Service, Wangdaizhijia
*``Troubled" refers to platforms that have encountered liquidity or insolvency problems, and are under investigation and/or have shut down.

The CBRC also imposed new rules requiring P2P firms to deposit investors' money at banks, throwing a bone to institutions that had been losing business to their upstart rivals.

Lufax, based in Shanghai and backed by insurance giant Ping An, had 18 million registered users at the end of December, according to Daiwa. Of these, 3.63 million were active while trading volume was more than 1.6 trillion yuan, according to the Japanese brokerage, making it the biggest of China's P2P lenders. 

The company (now renamed Lu.com) is valued at $18.5 billion after completing a second funding round with Bank of China and China Minsheng Bank in January. Its IPO -- likely either in Shanghai or Hong Kong -- will be among Asia's biggest if it happens this year and has bankers salivating to help arrange the deal. According to CBI Insights, Lufax is the world's most valuable fintech startup and the world's 11th biggest ``unicorn,'' as newly established businesses worth more than $1 billion are sometimes called.

There are plenty of challenges. Lufax, which is in the process of expanding into the brokerage business, is still unprofitable in its core P2P operations. Returns may be further eroded by competition, which has already driven down the interest rates available to investors. 

Losing Interest
Average interest rate of Chinese P2P platforms (%)
Source: wdzj.com

Online lenders to have gone public so far have disappointed. U.S. pioneer LendingClub has lost about half its value since its IPO in December 2014, while Yirendai, the first Chinese P2P lender to sell shares overseas, has plunged almost 40 percent since listing in New York two months ago.

There's also the threat of tighter regulation. At some point, China could require firms to apply for licenses, as it did for payment platforms, though that would slow the growth of an industry that China has sought to develop, as Rachel Xu, analyst at Shanghai market research firm Red Pulse, notes.

Nevertheless, the P2P industry looks set for further growth and few can be better placed to capitalize than Lufax. Ping An, which has a market value of more than $80 billion, owns 43 percent of the company. China's tougher regulation, meanwhile, will allow investors to sort the wheat from the chaff.

And in case anyone hadn't noticed, Shanghai's recently reopened IPO market is just as hot as ever, however moribund the rest of the exchange may be. Lufax is unlikely to be struggling for takers.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

(Corrects attribution for data on total and problematic P2P lenders in sixth paragraph.)

To contact the author of this story:
Nisha Gopalan in Hong Kong at ngopalan3@bloomberg.net

To contact the editor responsible for this story:
Matthew Brooker at mbrooker1@bloomberg.net