Red sky at morning, investors take warning.

Calamitous (a more than commonly plain and unmistakable reminder that the affairs of this life are not of our own ordering) is probably too strong a word for the peer-to-peer lending sector in China – but not far off. The summer has been particularly gruelling for peer-to-peer lending companies in China. The Peterson Institute recently reported that total outstanding loans in the industry collapsed to less than RMB 1 trillion in July from 1.3 trillion a month before, and many lending platforms have run into serious trouble since the beginning of June.

Potential systemic risks lurk within the peer-to-peer business model: practically speaking, P2P platforms in China provide guarantees, meaning that investors get no hint that risk is piling up until suddenly the platform cannot meet its obligations and the business evaporates. These platforms also issue wealth management-type products that have maturity mismatches, putting them at the risk of a run if investors have a momentary lapse of confidence and pull out their investments. The China Banking Regulatory Commission minted new rules in August 2016 making these practices illegal, but the turmoil over the last two months indicates that numerous platforms have quite likely disregarded them.

Banks and shadow banks in Beijing, Shanghai and Chengdu have begun noting a banking industry that is more riskaverse than ever. The hesitancy to lend into a weak economy is making everything harder than it used to be.

Peer-to-peer banking in China is a bit like your brother-in-law: a person whom you know well enough to borrow from, but not well enough to lend to.