If P2P Lenders Can't Make It In China, Can They Make It Anywhere?

However one might feel about peer-to-peer lenders, you have to give them this: They're really, really trying to make it happen. For Lending Club, SoFi and their ilk, each successive wallop just encourages them to keep fighting. But increasingly it seems that, like Harrison Ford's aviation career, the P2P industry has hit that point where doubt and genuine concern outweigh whatever goodwill its novelty once attracted.

The most recent sign of P2P jumping the shark comes to us from China, whose top online lender Lufax recently announced it would move from purely facilitating loans between individuals to offering stock-trading and other retail investment products. Evidently peer-to-peer is no longer peerless in the world's frothiest markets. From the WSJ:

The company—an affiliate of Chinese financial giant Ping An Insurance (Group) Co.—was founded six years ago with a business model like that of LendingClub, offering a matchmaking platform that lets customers invest in loans to individuals and small businesses. Of Lufax’s $56.9 billion in client assets, such P2P loans still account for around a third—though the company expects a drop to 15%—and yield an average of 8.4%.

But investors globally are souring on P2P lending, which tends to be less regulated and potentially riskier than traditional bank lending. LendingClub shares have dropped about 75% since its December 2014 New York IPO. In China, hundreds of P2P lenders have collapsed, including high-profile Ezubo Ltd., whose executives were arrested and accused of defrauding thousands of small investors of $7.6 billion.

It's a symbolic blow for an industry whose companies have made a habit of growing out of their initial disruptive model and becoming more and more like regular-old baks. UK's Ratesetter took a hit on the chin instead of passing it on to investors. P2P O.G. Zopa just went ahead and launched a bank in November. For years, American peer lenders have sent a lion's share of their loans to hedge funds and other institutional investors instead of individual “peers.” LendingClub's 2016 fiasco emerged in part from CEO Renaud Laplanche's efforts to shore up demand by investing in a firm that was buying up Lending Club loans – a kind of arms-length method of putting loans on company books.

None of that is terribly surprising, given the risks inherent in social lending, whose central proposition is “why don't we let John Q. Public evaluate credit risk themselves?” – a model that works well when demand is booming but quickly sours when the credit cycle turns.

But if P2P can succeed anywhere, it has to be China, where seas of pent-up yield-seeking capital slosh up against an endless array of investment vehicles as numerous as they are lightly regulated. There hasn't yet been a financial scheme kooky enough not to hoover up at least some Chinese capital. Yet here we are.