Auto-Trading Crowdfunding Shifts Into Overdrive

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(Beijing) — As China’s economy continues to be awash with liquidity, the latest hot sector for investors seeking ever-higher returns is crowdfunding for buying and selling used cars.

Tougher regulations on peer-to-peer (P2P) lending platforms and equity crowdfunding have led to a surge in the popularity of crowdfunding for vehicle trading, as many P2P providers have shifted to this underregulated segment of the online financing industry.

In 2016, funds raised by crowdfunding platforms for trading autos soared to 9.4 billion yuan ($1.37 billion) from just 750 million yuan in 2015, according to a report released on Tuesday by 01Caijing.com, an online-financing data and information provider based in Beijing. That amount accounted for 43% of the total amount of money raised through online crowdfunding last year.

Of the 193 crowdfunding platforms that opened in China last year, 162, or 84%, were raising money to trade vehicles, 01Caijing.com said.

Crowdfunding for auto trading involves the owner of the platform entering a partnership with dealers. Investors then combine to buy vehicles and sign a contract that allows the platform to be registered as the vehicles’ owner. The cars are displayed in the dealer’s showroom, and when a potential buyer makes an offer, investors vote on whether to sell at that price. If a sale is made, 30% to 50% of the profit is split between the platform and the dealer, and the rest is divided among the investors based on their financial contribution. If there’s no sale after three months, the platform or the dealer buys the unwanted car at a price 8% to 18% higher than what the investors paid for it.

Crowdfunding for used-car trading has boomed as the government last year embarked on a cleanup of online P2P lending after a wave of scandals and fraud hit the industry. The crackdown has already led to the closure of hundreds of platforms that failed to meet new regulatory requirements. Outstanding loans registered by P2P lenders amounted to $124 billion at the end of January, according to data from Online Lending House, a research firm that tracks the online financing industry.

The lack of clear rules governing crowdfunding for vehicle trading has also spurred its expansion, as platforms have more freedom to operate in the regulatory gray area.

“Since the government launched more stringent regulations to cover online financing, many P2P lending platforms have turned to car crowdfunding,” said Ma Jun, chief analyst at Online Lending House. “These platforms are taking advantage of the lack of regulations, but really, the nature of what they are doing is the same as ordinary online lending.”

Crowdfunding for auto trading appears to be particularly concentrated in Shandong, a coastal province in eastern China, according to data from 01Caijing.com. Of the 62 platforms registered in the province, 58 are involved in buying and selling vehicles.

Ma said Shandong had the most problematic P2P lending sites in China in 2016, and many of them were small online financing companies that often suffered shortages of funding due to poor management.

But it’s unlikely to be long before regulators catch up with auto-trading crowdfunding as fraud and scandals are already starting to emerge. As of the end of 2016, just under a third of such platforms had encountered difficulties in fulfilling their promises to repay investors, including some of the largest sites such as juchuangzc.com and baoyide.com.cn, the 01Caijing.com report said. The total amount of money involved was about 300 million yuan.

By Dong Tongjian

Caixin

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