Peer-to-peer lending company Lufax’s oversubscribed $1.2bn series B round, closed at an $18.5bn valuation, has helped to illustrate the rush to invest in China’s online finance sector.
Approximately $924m of the funding came from new investors including Bank of China Group, food producer Cofco, investment bank Guotai Junan and investment group Minsheng Shangyin International, while a further $292m was supplied by Lufax’s series A investors.
Insurance group Ping An, BlackPine Private Equity Partners, CDH Investments and China International Capital had previously provided $500m of funding for Lufax in April 2015 at a $10bn valuation.
Launched in 2011 as a Ping An subsidiary, Lufax’s online peer-to-peer lending and brokerage service had accumulated 3.6 million active users by the end of last year. It raised the money at a point where it is looking to expand its wealth management services and cross-border transactions, and is reportedly planning an initial public offering in its home country in the second half of 2016.
The round is one of several to be closed by China-based online lending services so far this year, with JD Finance, a subsidiary of e-commerce firm JD.com, agreeing $1bn in funding at a $7.1bn valuation. However, both look likely to be dwarfed by Ant Financial, the financial services affiliate of e-commerce group Alibaba that raised funding at a $50bn valuation in 2015, and which is now in the process of raising $1.5bn in capital.
In addition, WeLab has raised $160m, Duanrong $59m, Weijinsuo $46m and Ping++ an undisclosed sum in the eight-figure dollar bracket.
The rounds are evidence of the stratospheric growth of the Chinese online lending industry, which now includes some 2,600 platforms incorporating about $66bn in outstanding loans, according to figures compiled by Online Lending House.
Questions remain however as to how long the growth can last. The industry has attracted fraudsters that have made away with investors’ money while other platforms have gone bankrupt, leading China’s government to draft rules last month forbidding lenders from issuing guarantees to their customers, or from operating as anything but intermediaries between investors and borrowers.
China also intends to place limits on amounts that can be borrowed and prohibit the sale of wealth management products, insurance, funds or trust products. The rules will likely inhibit industry-wide growth in the short term, but may well also compress it, so that the market leaders continue to pull in customers and funding while their competitors are squeezed out of the sector.
Nevertheless, with China’s stock markets having been in turmoil for months, doubts must remain over the long-term stability of such platforms and whether they have the ability to meet their customers needs, particularly as many are offering high rates of interest in excess of that provided by brick-and-mortar banks. Another issue is that online lenders can often attract borrowers unable to secure loans from mainstream banks, which could affect the reliability of the loans.
None of this is to say a crash is inevitable, or that China stands out from other markets – online lending is also growing at a quick rate in the US, as the $150m raised by LendUp last week shows – but it is important to remember that the sector is still relatively new and untested, and investors may want to consider the risk before they throw all their chips into the pot.