The deeply unpleasant news that the Yulin dog meat festival is to go ahead despite global abhorrence and calls for its banning set me thinking about Chinese regulation and the different approaches that our two financial systems take to ensuring an orderly market and investor confidence.
The reason given by the Chinese authorities for their failure to end this macabre festival of cruelty is that they don’t licence the event and that, in any case it’s not illegal to eat dog meat in China. This is one of those factually correct assertions that, whilst being true is also completely disingenuous since it ignores the reality on the ground. Many of the hapless animals caught up in this are stolen, and are subsequently killed in such a barbaric manner that even the laissez faire regulations concerning animal welfare that pertain in China are being flouted. As ever, it will take a significant shift or event to occur before the authorities will put a stop to this, and by then the number of victims will have been needlessly inflated by a lack of will to act.
‘A poor show’ I hear you say, ‘but what has this to do with financial regulation?’ Well there are parallels between the Yulin situation and what is happening in the massive Chinese Peer to Peer market place. To explain. In the early days of the UK P2P movement a number of the more far sighted operators lobbied hard for their activities to become regulated by the Financial Conduct Authority. Their reasoning was that without investor confidence the model had no chance of realising its potential. Indeed, James Meekings, co-founder of Funding Circle said to me at the time ‘you don’t become a billion pound industry without regulation’. In the context of the UK that was true then, and is still true now. Indeed, we are looking at the billion pound mark some way back in the rear-view mirror.
This far sighted approach was opposed by many of James’s contemporaries who saw regulation as nothing more than an intrusive and burdensome drag anchor that would stifle the growth of their early stage business. The fact that many of them had sold their early stage investors a fantasy business plan predicated on wholly unrealistic growth rates didn’t help much either. But James and the other pro regulation lobby got their way and the FCA recognised that a proposition that solicits investments from retail investors and then lends their money on again should, quite rightly, be regulated. With admirable pragmatism they introduced the regime in such a way as to cause the minimum disruption to the existing players and to avoid putting barriers to entry in front of newcomers to the space.
So now we have a P2P sector which enjoys, by and large, an excellent level of investor confidence and is set on a course to play a significant long-term role in the UK’s financial landscape. Essentially the steadying (and slightly slowing) hand of the regulator produced a far greater probability of good investor outcomes, and thus sector longevity.
China, by contrast, chose not to regulate the activity of its massive P2P market at all. On the one hand this approach did lead to the kind of growth that regulated providers can only dream of, measured in the hundreds of percent year on year. This has come at a terrible price for the industry however. Of the fifty billion or so that has so far been lent across Chinese P2P platforms it is estimated that as much as half may be fraudulent. Indeed, one platform entrepreneur recently absconded with an estimated seven billion dollars of his investors funds. Seven billion!
It is impossible for an industry that needs, above all, investor confidence, to survive shock after shock of this sort. In failing to foresee the inevitable Ponzi style free for all that a lack of oversight would produce, the Chinese authorities effectively signed the death warrant on this part of their alternative finance market. There will, no doubt, be some survivors, but their lack of action before the event has meant that, like Yulin, there are thousands upon thousands of needless victims, and the stench of permanent reputational damage. Shame on them.
