China’s peer to peer lending crisis worsens. Hunan’s move is likely to spur other provinces to control the wayward financial sector that has seen more than 5,970 platforms default or shut down as of September. China’s central Hunan province will ban all peer-to-peer (P2P) lenders, a local financial regulator said on Wednesday, in the most radical action taken by a provincial government against the industry notorious for frauds and defaults. None of the 24 local P2P lending platform operators investigated by authorities complied with regulations, the Hunan Provincial Local Financial Supervision Administration said in a statement. The lenders will be banned from conducting any new business, along with all other companies from other provinces that operate such business in Hunan – home of China’s founding father Mao Zedong, according to the statement. The move is likely to prompt other provinces to take a tougher approach on disciplining the wayward industry, Liu Feng, chief economist at China Galaxy Securities, said.

“Putting a stop to the industry for now is a way to solve the current problem, because so many people have already been scammed. Laws and regulations have to be put in place first,” said Liu. China’s P2P lenders, set out to connect borrowers with lenders directly and skip the middleman of traditional banks, have become an infamous example of the dark corners in the country’s financial system and shadow banking sector.

A number of Ponzi schemes have been exposed in the industry, and many P2P lenders were found to have misappropriated investors’ funds for their own use, such as on risky property projects or personal entertainment.More than 5,970 P2P lending platforms have defaulted on payment, absconded with cash or quit operations as of the end of September, according to data provider Wangdaizhijia. That put at risk over 214 billion yuan (US$30.1 billion) of investments from more than 2.7 million lenders, who are mostly small investors with little financial knowledge lured by high returns. “Government regulations failed to catch up with the fast growth in the industry, and things became out-of-control,” said Liu. In comparison, P2P lending grew at a slower pace in the US but has been better regulated, he added. The government is now tightening its oversight on not just P2P lending but also privately offered funds and other sectors, after recognising the risks in the country’s shadow banking industry, Liu said.The approach represents a sharp turn from Beijing’s initial encouragement for P2P lending among other forms of “financial innovation” in 2013. Xeenho.com, a Hunan-based P2P lender, said it will continue working to repay investors who were owed money through their platforms, unaffected by the ban.