Implosion of China’s P2P Lending Boom Hits Consumer Spending

First sign: auto sales suddenly plunged.

The Chinese government legalized peer-to-peer lending platforms in 2015. P2P sites attract money from individual investors – mostly savers – by offering them extraordinarily high yields. They lend this money at high interest rates to borrowers who have trouble getting loans elsewhere – classic subprime. By the end of 2017, there were over 8,000 P2P platforms, according to the People’s Bank of China, with over 50 million registered users. By the end of June, in a little over two years, the industry had gone from zero to $190 billion in outstanding loans.

That was the peak. But the fun didn’t last long. Borrowers defaulted on their loans or just absconded with the money, and the platforms began collapsing. In May this year, regulators stepped in. By the end of July, 4,740 P2P lenders had collapsed or where shut down.

Left holding the bag were millions of investors – mostly these savers who’d tried to make a better return on their savings in this newfangled risk-free manner. Suddenly, regulators told them that they should be prepared to lose their entire investments in these products.

The situation continued to follow the Chinese script. The savers started protesting in the streets. “P2P refugees,” as they called themselves, headed for Beijing Financial Street, where the People’s Bank of China has one of its buildings, and where most regulatory agencies are located. They were met by a large contingent of police.

Social unrest and display of public anger that might get out of hand being the greatest fear of the Chinese government, it was time for a bailout – particularly after the government-ballyhooed stock market collapsed for the second time in 2015 and remains collapsed to this day.

At the end of August, China Cinda Asset Management, one of China’s four big state-owned bad-debt managers, confirmed a previously rumored meeting with the China Banking and Insurance Regulatory Commission and said it would “proactively” help the government deal with the P2P fiasco.

Cinda and the other three big asset management companies – China Huarong, Great Wall, and China Orient – were established by the government in 1999, with funds from the PBOC, to buy a huge load of bad loans from the big four banks following the 1997 Asian Financial Crisis. These asset managers were supposed to liquidate these assets and then cease to exist, but now they’re bigger than ever and have become conglomerates, stuffed with distressed assets and scandal-tainted companies.

“P2P risks are a social issue of great concern in China,” Chen Yanqing, assistant to the Cinda’s  president, told reporters, according to the South China Morning Post. “As a professional company managing bad debt, we will proactively take part in tackling relevant risks and help the government address the issue,” he said, adding, “The regulators wanted to draw on our past experience about addressing bad debt risks.”

Cinda’s chairman, Zhang Ziai, said Cinda would use “investment banking thinking” in dealing with this bad debt, such as restructuring, liquidation, and debt-for-equity swaps.

Whatever happens to the savers whose money disappeared is one side of the P2P-implosion. The other side: Consumers who borrowed via the P2P system and spent this money. Suddenly these doors are closed. And this has now shown up in a plunge in auto sales that has totally surprised the industry.

Investment bank Stanford C. Bernstein, cited by the Automotive News China, estimated that P2P loans in 2017 had contributed about 9% to total new-vehicle sales.

Shanghai-based Shenwanhongyuan Securities, also cited by Automotive News China, estimated that P2P lenders had contributed about 10% to 15% to new-vehicle sales.

Whatever the exact percentages, P2P loans had become in important driver in new-vehicle sales. But the sudden implosion of the industry and the government crackdown have brought this lending activity to a near-halt – and these often-young borrowers might not be able to borrow elsewhere.

This might explain the sudden drop of auto sales in July.

In May, new vehicle sales still surged 7.9% from a year ago. Through the first five months of the year, sales were up 5.1%. But in June, the year-over-year sales increase eased to 2.3%. And in July, sales actually fell 5.3% year-over-year.

The July sales decline was driven by an inexplicable 8% drop in the previously hot demand for crossovers and SUVs.

August sales numbers will come out shortly and should shed more light on the impact of the collapse of P2P lending [Update Sep 11, 2018: in August, sales of passenger cars fell 4.6% year-over-year, thus confirming the sudden downturn of the market].

That 5.3% decline in July was a big, sudden, and unexpected swing from the 7.9% surge in May. The industry, which is still struggling to explain it, has come up with all kinds of explanations. But Automotive News China managing editor Yang Jian writes:

The sharp cutback in lending provides a more convincing explanation for the sudden softening of new-car demand in China than other factors typically cited by analysts, such as a slowdown in economic growth and the escalating trade war with the U.S.

In the second quarter, China’s GDP growth slowed to 6.7% from 6.8% in the first quarter. On July 6, the Trump administration imposed an additional tariff of 25% on Chinese goods worth $50 billion. It’s true both factors might have affected China’s new-vehicle sales to some extent, but not so soon and so dramatically as Beijing’s crackdown on P2P lending platforms.

The sudden flood of loosey-goosey lending by P2P platforms to consumers, particularly to young consumers with subprime-type credit records, that commenced in 2015 and suddenly ground to a halt this year wasn’t only spent on new vehicles. It was spent on all kinds of consumer goods. With that source of risky debt drying up, the spending that had been funded by this debt is taking the hit. And savers who’re losing their life savings on their P2P investments are probably not encouraged by their losses to spend even more.

An entire generation on Wall Street has never seen Treasury yields this high. Read…  These “Gradual” Rate Hikes Start to Add Up: US Treasury Yields up to Three Years Hit 10-Year Highs

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  58 comments for “Implosion of China’s P2P Lending Boom Hits Consumer Spending

  1. Mark says:

    On July 6th tariffs on car imports from the US into China were increased by 25pp. To my knowledge a lot of SUVs are build in the US and shipped to China (e.g. by Daimler, BMW and the US makers). Daimler issued a profit warning because of it while other makers increased prices. This sounds to me like a better explanation of a sudden drop in (very expensive) SUV sales than missing credit for subprime customers. After all the market in China is along way from SUVs for everybody mania like the market in the US.

    • Wolf Richter says:


      Given the 25% tariff that has always existed in China on imported vehicles, very few vehicles are imported into China (in relationship to the size of this market of 24 million new-vehicle sales a year). All global manufacturers have plants (joint ventures) in China and build China-specific models.

      In May, China slashed the 25% tariff to 15% (effective July 1) as part of its negotiations with the US. So that should have boosted July sales. And imports actually surged in July. But sales overall fell.

      The current increase in tariffs only affects vehicles imported from the US to China, not those imported from Japan, Korea, Germany, etc. and came during July and clearly did not impact July imports negatively since imports surged.

      • Mark says:

        After reading the links you provided I stand corrected since SUV sells actually began their slowdown in June, before the tariff increase. Also the import numbers cited by Nikkei seem too low to affect overall market trends even in specific segments (1.6million total, 150.000imports in July, given the year to date number of 13.3million a slow month).
        That the tariff changes would not be negative for overall imports is obvious, which is the reason I singled out SUV imports from the US. But while the US-China trade maybe significant for some car companies, as shown by the profit warnings, it looks too small to affect market trends.
        Thank you for providing additional information.

        • Gene says:

          Why do you keep saying tariff increase when the tariffs were reduced by 10% as Wolf correctly pointed out.

        • Wolf Richter says:


          This gets a little confusing. China reduced the tariff from 25% to 15%, effective July 1, and then a few days later added a 25% tariff for US-sourced new vehicles for a total of 40% tariff (15% plus 25%) for US sourced vehicles. Vehicles from other countries are not impacted by the latest tariff.

      • Paul says:

        I don’t know where you got the 27 million new vehicles sales per year number.

        I remember when it peaked at about 17 million a few years ago, and I just Googled it and got numbers closer to 14 million recently.

        Maybe 27 million includes motorbikes?

  2. Pidgin says:

    Who do you think gets the worse citizen score – the P2P lenders who lost and marched in protest, or the individuals who ditched on the loans?

  3. fjcruiserdxb says:

    P2P lending is a risky business whichever the country you are in. In regulated countries like the UK, P2P lending has been going on for a while. It is regulated but it is not covered by the deposit guarantee that bank deposits enjoy. It is covered under the savings scheme with a small amount of your interest being covered in case of defaults. I wonder how many investors know this considering that the bulk of these investors are ordinary savers who were looking for better saving rates than those paid by saving accounts. With short term rates increasing, banks launching more attractive term deposits and notice accounts with better interest rates, I believe the days of P2P are numbered. It is likely that the borrowers using the P2P platforms will increasingly be sub-prime borrowers.

    • Max Power says:

      I’m also wondering if China doesn’t have a relatively sophisticated credit scoring system like say the US has? And it’s not just about having sophisticated scoring in and of itself, but also having significant personal repercussions of messing up one’s credit score through defaults and bankruptcies. Mess it up and besides difficulty obtaining credit you may also run into issues getting a job, a place to live, will have to pay extra for insurnace, etc.

      Without having this kind of credit scoring infrastructure (and “repercussions”) in place, I could see how defaults in P2P lending can easily get out of hand.

      • Ambrose Bierce says:

        According to a recent MSM piece China has a super efficient credit scoring system, they look at every penny you spend. Well maybe it gathers a lot of data anyway.

        • TheDona says:

          See Pidgen’s comment above. Worse than credit score, they have a citizen score which includes your credit score. Complain…you get dinged. Don’t pay…you get dinged. Write a blog about it…you probably get arrested.

        • Max Power says:

          Yes, I’ve heard about China’s social score thing. However, I don’t know if any of this is integrated with these P2P outfits.

  4. MCH says:

    The tarriffs are an excellent scapegoat for some of the ills that would happened in China anyway. I expect that it will next be used as an excuse for a contraction in the real estate markets.

    Given the degree of related corruptions that goes on, is it any wonder why people with any means are desperate to get their money out of the country using everything from foreign real estate to cryptos. Because even if half of the value is lost, it would be better than losing everything.

    • MC01 says:

      The Chinese government/big business (hard to tell where one ends and the other begins) are already abusing the “tariffs” justification in the same way their British colleagues are abusing “Brexit”. It would be funny if so many supposedly intelligent people didn’t buy into it.

      Residential real estate in China will most likely not be afflicted by the P2P implosion, chiefly because banks (chiefly small, local ones we’ve never heard about) keep the land rats rolling into cash. It’s basically the most important pillar of the Chinese and, by extension, worldwide economy, and it’s scary to think over 75% of the units delivered yearly are not meant for human habitation but as “investments”.

      Regarding capital flight… the present favored route by Chinese nationals seems to be overinvoicing when buying commodities from abroad. A recent investigation by Chinese authorities found 80% or a similar silly amount of transactions from teapot refineries in Shandong showed clear signs of overinvoicing and have sworn to crack down on it. Somebody is going to jail unless he/she can fast-talk really well or bribe the right persons. “Hit one to educate a hundred”.
      Given overinvoicing seems to be the sole reason for many, many otherwise incomprehensible commodity purchases by private Chinese companies abroad, if Chinese authorities were to make good of their threats we can expect choppy seas in commodity markets ahead.

      • nick kelly says:

        ‘and it’s scary to think over 75% of the units delivered yearly are not meant for human habitation but as “investments”.’

        Agree. Nor are they ready for habitation. They are often an empty concrete shell.
        I don’t have the numbers ready to complete an apt, but I do know that a new house to the ‘lock up’ stage, with windows and doors, is only one third of the money to complete.

        All the guy is really buying and all that backs the loan is what we would call a strata lot, but with concrete walls. Since we know how creative financing can be, to which China brings its own secret sauce, it would be interesting to know how many of the loans have a loan- to- value ratio reflecting this.

        • roddy6667 says:

          I don’t know where you get your “information” about new homes in China, but you are way off. A new home is sold as a concrete shell. They come with doors and windows, rough plumbing and electric. The heat, in the floors, is already in and pressure tested. The concrete walls are plastered and come with one coat of primer. This is standard all over China. It costs about another 20% to finish it to move-in condition. I own a home I bought here in China in 2010. As I travel around inside the country, I track new construction prices and amenities. There is probably nothing more inaccurate in the Western media about China than the way it reports on residential construction. The biggest fallacy is the idea of “ghost cities”. American reporters don’t know the difference between a home that was bought for cash as an investment for the future and one that is empty because the builder can’t sell it.

        • MC01 says:

          Roddy, perhaps you can confirm something I’ve noticed.
          These mom and pops types who buy real estate seem roughly split in two categories: the first are those who want to sell at a profit over a short time horizon (two years seem common), the second are the “hoarders”, as I call them, who don’t seem to have much of a long term plan for their apartments. They may sell if they need the cash and/or find somebody to sell at a profit, but generally speaking seem a bit lost when it comes to long-term planning. They seem to really believe “prices will go even higher” despite the heating inflation chipping away at it. I don’t know how CPI is on the ground this year, but PPI is coming in hot in China. Some part suppliers quoted me a hefty 40% over same period last year!

          PS: it’s pretty obvious Chinese apartments come plastered as standard, as Sany bought Putzmeister… well, the joke doesn’t work unless you know a bit of German!
          Take care in the Celestial Kingdom.

        • nick kelly says:

          In a country of over a billion people is it just possible somewhere a real estate project is not as advertised and financed or are Canada and the US and Italy and the UK and … unique in that respect?

          We know for certain that the auditing of multi- multi tentacled Ali Baba is a joke by US standards. According to a piece on WS, the bill from the HK accountant to audit the conglomerate with 900 subsidiaries is about what a large US auto dealership would pay.

          Since real estate has been a favorite for scams since forever, is it more or less likely that China is immune?

          We are a bit jaded re: China in Canada, because our largest fraud in recent history was Sino-Forest, whose Chinese forests turned out to not exist.

          Parenthetically, if it costs 20% to make it ‘move in’ ready, there is either quite a difference between the standard in the US or the cost of finishing is lower, or the price for the shell is high compared to the cost of finishing. Also, that pressure tested heating in floor better not leak. Ever.

          As of 2015, Anne Stevenson-Yang whose outfit specializes in getting the real numbers out of China, said she had visited ghost cities, i.e., ones with dozens of towers not that new but mostly empty. Since China is big, it must be difficult to monitor so many. Maybe some are and some aren’t.

          Then there is (or was) the world’s largest mall, complete with one kilo long ‘Venetian’ canal.
          After being open for 2 years, it achieved less than 5 % tenancy and was slated for possible demolition. Ghost mall?

  5. J.M.Keynes says:

    – If this plunge in car sales continues then at some point chinese steel producers will be hurt as well.
    – People said that chinese demand (for e.g. cars) would continue for ever. I never believed that.
    – The decline in car sales also could be (partially) due to saturation of the car market(s). If I (in my capacity as a consumer ) have bought a car (used or new) then I won’t need a car for the next coming years. Then the demand will only come from buying a car when the old one has worn out.

  6. Kasadour says:

    “P2P risks are a social issue of great concern in China. . . “

    Wait- what about all the promised prosperity for all Chinese people from the New Silk Road (One Belt One Road) initiative? Isn’t this centrally planned initiative supposed link up every nation in the eastern hemisphere and lift them all out of debt?

    • Rates says:

      No, it puts them in hock to Beijing. Malaysia has recently withdrawn. Same shit with other Infrastructure/Development banks. You borrow from the IMF and suddenly Washington gets to direct everything.

      The lesson is clear i.e. no matter of you are a country or a household, don’t get into debt if possible.

  7. Dymo says:

    This is a good will that the lenders defaulted and the P2P platform collapsed. However the most of the P2P platforms are state-owned or state-related as advertised at the begining, this is the reason why the people had confident to put all their saving to these platforms.

    The conspiracy was many state-related companies near bankrupted and if the P2P platform shutted down and the people’s money would became these companies money. Sacrifed the people and save the country.

  8. Dave Griffy says:

    Wolf –
    Thank you for another illuminating post.
    “Wolf Street” is a daily stop for me on the internet – because of informative articles like this one (including the fact that China has already reduced their tariffs on US car imports to 15% – did not know that).
    I suppose the answer to the following is obvious but I do not know: Do P2P platforms fall into the category of “Shadow Banking” systems? If so can the effect of them in a country’s Shadow Banking system ever truly be measured or even quantitatively known?

    • Wolf Richter says:

      Dave Griffy,

      Yes, P2P is part of “shadow banking” (all non-bank lending).

      In China, many local and provincial governments, along with companies, also have borrowed through complex opaque structures in order to hide their actual debts. This is a vast problem that by a huge margin exceeds the problems of P2P. The central government is grappling with this right now — but it even doesn’t know the extent of the problem that it calls the “hidden debt.” It is now trying to make these entities disclose how much debt they actually have.

      • raxadian says:

        I prefer the term “shadow debt”, is there but only if you look for it. Just like people tend to ignore shadows save when they mess photographs.

        And boy this messed up the “picture” China wants to show the World of being a healthy growing economy.

        But granted is far from the first thing doing so.

  9. roddy6667 says:

    P2P lending, in China and the US, is nothing but loan sharking enabled throught the Internet. It’s a good thing that it all collapsed.

    • Javert Chip says:


      Problem is, if you dis-allow all the “semi legitimate” high-interest lenders (pay-day loans, p2p, etc), you end up with some people forced to borrow from REAL loan sharks, all of whom seem to be named “Vinnie” and carry a baseball bat.

      Be careful what you wish on other people.

    • Rates says:

      BS. Lending Club, etc although overvalued as businesses are legit. In fact for people who really want to pay off their loans, Lending Club et all provide a service that works. It’s a true win win for both borrowers and investors.

      The problem is that there’s no barrier of entry to this business so bad actors would get in.

  10. Paulo says:

    Peer to peer lending? How desperate or blind can people be? And bailing out something that should never have happened anyway makes the Govt just as stupid.

    • Prairies says:

      Borrowing from a bank is peer to peer. The difference is the bank is held to a strict standard and can’t lend to people with bad credit. The bank counts as peer to peer in my eyes because it needs deposits(peers) to build up a pool for it to borrow with and lend out to you(peer). The problem with shadow banking is the lack of regulations allows them to take on risky borrowers who always default, they wouldn’t have a bad credit rating if they paid back their debts in the first place.

      • Javert Chip says:

        You SERIOUSLY misunderstand what p2p is.

        Borrowing from a bank is definitely not peer-to-peer.

      • Rates says:

        LOL. What you mentioned is banking as taught in universities. Banks don’t need deposits to lend money in the US or anywhere as long as it’s in local currency.

        Loans create deposits, not vice versa.

        All explained here:

        • Wolf Richter says:


          I’m so tired of reading this BS you just said. It keeps coming up because people like you REFUSE to READ the frigging paper you just linked. This is a theoretical study that tries to show how the banking SYSTEM as a WHOLE creates money by creating DEPOSITS (not loans) as a whole. So spend an hour reading and understanding this 61-page paper instead of propagating this BS on this site.

          NO individual bank creates money to lend out. PERIOD. All banks need to obtain funding to make loans. Sources of funding include deposits, bond sales, preferred share sales, stock sales, borrowing from other banks, borrowing from central banks, etc. If a bank runs out of funding, it collapses.

          Read the financial statement of a bank to understand the critical importance of bank FUNDING and the costs of that funding. These are prominent features of bank financial statements. If you really want to understand banking, you can. But you need to spend some time on it, and stop regurgitating nonsense.

        • Prairies says:

          Thanks Wolf, I am not a complete fool after all. I believe I may have short formed it a bit much, but the principle of the argument is there. Banks don’t create the loan without borrowing money themselves.

        • Crysangle says:

          I’ll just dip a toe in the deep end then dive into the nearest foxhole :

          “NO individual bank creates money to lend out.”

          If no individual bank creates money, then who does or
          is it a collective effort, or did whoever just find it lying around in an empty vault with a small note reading “Thanks for all the gold”?

          If it is not to lend out, is it just to give away or spend?

        • Wolf Richter says:


          The linked paper says that the banking system as a whole creates money by complex mechanism (via deposits). This is a theoretical paper. There is amazing little rock-solid agreement on HOW exactly the banking system as a whole actually creates money. Hence all these theoretical papers that try to come up with a theory of how it works.

          But there is no disagreement on these two points:

          1. The banking system as a whole (which includes the central bank) creates money.

          2. Individual banks cannot and do not create the money they lend out. They have to obtain the money they lend out via their funding methods (deposits, bond sales, stock sales, preferred stock sales, loans from other banks, loans from central banks, etc.)

        • Crysangle says:

          Yes, that fits.

          The creation of new deposits via lending, which is frl at work alongside double entry book keeping, does rely on existing deposits. Money cannot just completely be invented by an individual bank. As demand deposits and cash are considered base money supply (or M1), base money expands this way. I have seen ways of labelling the original gold backed notes that then detached to become the original base of fiat, as credit in perpetuity… a lucid but not fully convincing phrase. I think the central bank theoretically has no limitation on its ability to expand the base money supply, and even if it did changes in legislation could overcome that I imagine.

          From a certain critical perspective though, the question is really not if one bank can create money of nothing, but whether the banking system as a whole does, or has. That returns to whether a person considers frl double entry bookeeping as sound, as well as if the original units it uses in that, themselves are sound. The question runs into philosophy and morals and for that it is so wide open to discussion and dispute.

        • Wolf Richter says:


          On rereading my reply, I apologize for going off the rails like this. I understand that you didn’t read all the comments on this topic that I had to read over the years, and that I had to debunk. This really gets to me since it keeps showing up so persistently, and it’s so important. But I understand that you might not have seen these comments and my many replies. And it might have been the first time that YOU mentioned it, and I shouldn’t have been so nasty.

          So cheers!

        • Rates says:

          Sorry Wolf, I did read it. You mention all that but you did not once address how said “funding” comes into existence in the first place.

          You said “Sources of funding include deposits, bond sales, preferred share sales, stock sales, borrowing from other banks, borrowing from central banks, etc. If a bank runs out of funding”.

          Sales, etc need to be paid with “money”, which comes from another account which comes from another account and possibly ending in some Central Bank. This is where “borrowing from central banks” come in i.e. CBs don’t give out money, they create loans and that in turn creates deposits.

          Theoretical? I think not. Can banks run out of money? Absolutely:
          1. They lend out in a different currency. I mention that above in my original argument.
          2. Their collateral is super bad and hence lenders of last resort will not lend to them.

          Please explain how “funding” comes to be before saying it’s all BS. Waiting for a reply.

        • Rates says:

          Straight from the horse’s mouth:

          No doubt the guy is mistaken. He only works at a Central Bank after all.

        • Wolf Richter says:


          You STILL posted a link to a paper that you didn’t read. You have no clue what this paper is talking about. It’s saying the same thing the prior paper you linked says: it’s a theory of how DEPOSITS via a complex mechanism create money in the banking SYSTEM. NO individual bank can create out of nothing the money it lends out. You’re nuts to keep thinking this. READ the frigging paper.

          I’m sorry I apologized for “having gone off the rails” in my prior reply. I should have gone off the rails a lot more.

        • Crysangle says:

          Rates – I don’t pretend expert level but I have read ( and read and read) on this topic. In fact last night I re-read just to brush up, and when I have a moment I will resume the most important with links here.

          The short of it is :

          The central bank can create deposits allocated to ordinary banks in exchange for collateral. It just takes an asset onto its books and types in a figure. Those are called the reserves of ordinary banks at the central bank. They do not directly make it to the consumer, they do not get used directly to create loans to the consumer. They are a tally system between ordinary banks at the central bank. They influence according to legislation the ratio of lending permitted by an ordinary bank using its customer deposits.

          Ordinary banks need deposits, that is deposited cash basically, to lend from. They can relend that cash, as it gets redeposited by the loan receiver in his newly created account, so expanding base money. The central bank has various methods of control to influence how able or willing ordinary banks are to be in their efforts of monetary expansion.

          You have monetary base , that is cash plus reserves held at the central bank. The central bank can expand or shrink that monetary base at will.

          What the central bank does then influences the monetary base (M1), which is cash, travellers cheques and demand deposits at ordinary banks.

          So you have a tiered system. In theory the central bank is working to simple target in its policy ( e.g. 2% inflation) , in practice it has levels of economic, political, and financial leverage over “its” population and other populations that interact with it, beyond anything we might imagine. Ordinary banks act as handmaids in this whole show, or in unison or with indirect influence over the central bank ( e.g. tbtf or supporting a presidency etc) . They decide where to leverage, part on market circumstance, part on the amount of rope that might be their end – that rope is ultimately controlled by the central bank. Whether you think it all works by a happy concensus or is completely corrupt, is anyone’s opinion, but one thing is for sure, there is no hard accountability built in to this system, and it can be and is, misused.

          So the argument between you and Wolf is really just the difference of which technical side you are discussing – ordinary banks, central banks, or the whole. That is kind of Wolf to apologize, others would not. It is a tense topic because it is poorly understood and so often misrepresented in discussion. Often those who misrepresent how it works are however correct in certain fundamental ways, hence the argument.

        • Crysangle says:

          Rates – that BOE link is wrong. It says by lending deposits a commercial bank creates money, ” fountain pen money “. This is not so, what it does is create separate claims on the same money, where the original depositor and the loan receiver have access to that money.

          The commercial bank ACCOUNTS it as the new loan it made being an ASSET that is worth AS MUCH AS the money it lent to create that loan. It is then able, in dire circumstance ( both depositor and borrower claim access at the same time, or the borrower does not repay) to go to the central bank and ask the central bank to buy the asset with invented money to make the accounts whole. The central banks do not buy low quality debt to make the equation function in practice, they buy high grade government bonds that place enough new money in the system to help the original borrower receive some to repay, or for the commercial bank not to go under if that loan is not repaid.

          Commercial banks, by themselves, do not create money, they lend and re-lend the same money. This has the effect of increasing access to the deposit cash held by that commercial bank for use by consumers, at the expense of endebting them. This increase of use of that money causes inflation, and so the real value of the money shrinks for the savers.

        • Crysangle says:

          Here is a hint :

          Trust nothing that is written regarding fiat money as not being manipulative.

          Learn the definitions of :

          Monetary base.
          Base money (M1, M2 etc.)
          Narrow and broad money.
          Central bank reserves.

          And who creates them, and also how.

          The BOE is talking broad money – which includes assets that can be used LIKE money.

          Financial entities, including central banks, introduce lack of clarity to allow confusion, to avoid transparency. They conflate and cross conflate with social theory and economic theory, with politics and justice and theology even. The actual equations are evasively simple, they are dressed up in a complicated matrix of interdependence , terminology and theoretics.

          So for example, does anyone in the system arbitrarily assign a monetary value to an asset? If so who?

          E.g. of answer :

          A commercial bank judges by ( a%*34/b2) that you are worth % being lent to….but it chooses.

          A central bank decides that asset A is worth the figure it purports to be worth, and invents payment for it.

          The base reality is so stupidly simple you have to be stupid to understand it ( I DECIDE !…. uh ok) and there are lots of nice long confusing equations prepared and just waiting for stupid people who come along looking for an answer to what is going on, that they know will not be understood but will be accepted as explanation.

          The only way I know to not be influenced/prejudiced in action or thought regarding this is to remain independent of it somewhere or somehow – because simply existing on the same planet is excuse enough to be made complicit in its reality, according to those pursuing one all encompassing plan or another.

          So follow the lead or join the herd, if you must, but try not to be misled by fully trading your own ability to reason for what any other direction only purports to offer – because where you end up will only be able to be effectively reasoned as product of own choice.

          But for the grace, we are responsible for ourselves, are we not?

        • Crysangle says:

          I haven’t the patience to write a full article in comments piecing the jigsaw of links clearly together, but in these you will find most of the explanations needed when combined :

          The definition of monetary bases

          QE changes M1

          Longwinded fed explanation

          Double entry book keeping wrt reserves at the central bank

          Other questions on how the fed reports its monetary base

          These links are all well grounded I think, but you really have to read, read again, look up questions, picture, read again etc. to build a clear idea of the detail of what is going on…most people are just happy to get paid for a days work and hit the town, or pay off debt and sit in front of the tv etc…. I don’t blame them too much for that lol.

  11. Anthony says:

    Oh dear.
    Neither a borrower nor a lender be.
    – William Shakespear, Hamlet

    • Cynic says:

      Prospero did quit well for himself if I recall rightly – an alchemist and a magician, with a private island!

      Shakespeare clearly knew all about finance…..

    • Malthus says:

      And continues…
      “For loan oft loses both itself, and friend
      And borrowing dulls the edge of husbandry”

    • nick kelly says:

      ‘It is then able, in dire circumstance ( both depositor and borrower claim access at the same time, or the borrower does not repay) to go to the central bank and ask the central bank to buy the asset with invented money to make the accounts whole.’

      Dear Chrysangle: in normal times (not 2008) how many times do you think a bank gets to run to the Fed and say: ‘sorry, we are in dire circumstance, could we please have some of that money you create?’

      Baby you are now done. The Fed’s job now is to get a bank to buy your bank possibly for a dollar and possibly with some guarantees from the Fed.

      And you are trying to sound like an expert.

  12. Chris says:

    Wow, thanks for this. This dynamic is incredibly important to be aware of.

  13. Tom Stone says:

    A “Risk Free” high yield investment IS generally risk free, losing your investment is almost a certainty.

  14. Ambrose Bierce says:

    Creating a vibrant consumer economy is not the goal of Bejing, so that at least politically they can get out from under this one. Chinese security is also adept at knowing who to push around and who to leave alone. As long as they keep coming up with new Belt and Road initiatives the empire keeps expanding with no official policy of bread and circus.

  15. Gian says:

    P2P yields may be great, if you ever get them. Funny that greed of the “savers”, as usual, overcomes commonsense. What was the collateral, cars and consumer goods? Apparently, the Chinese learned nothing from our subprime debacle. I like Chinese proverbs and while this one may not be Chinese, it does fit the occasion: “A wise man learns from the mistakes of others, a fool only from his own”.

  16. Wolf Richter says:

    The August new-vehicle sales data was released today, and I’ve updated the article with this:

    Update Sep 11, 2018: in August, sales of passenger cars fell 4.6% year-over-year, thus confirming the sudden downturn of the market.

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