Last year, peer-to-peer (P2P) lending in China surpassed the US$100 billion threshold and confirmed China as the world’s largest P2P lending market, leaving North America a distant second. This tremendous growth was driven by a mix of circumstances, including:
- Well-developed saving culture.
- Low interest yields on savings accounts.
- Widespread online connectivity.
- Cheap smart phones.
- Indifference of traditional financial institutions to serving poor individuals and SMEs.
- Benevolent regulation.
For some time, Chinese regulators refrained from interventions and let the industry grow and evolve—taking a “wait-and-see” approach. While this has helped to grow the industry, it has also created some issues, including platform failures and practices that might not always be considered “healthy innovations”:
- Pooling, slicing, and packaging of underlying loans.
- Guarantee of repayment and financial returns without proven capacity to deliver.
- Shadow banking-like maturity transformation.
Those issues together with instances of fraud, the largest of which has been the E’zubao Ponzi scheme, which exposed 900,000 investors to losses upwards of US$7.5 billion, led to a focused regulatory intervention. The regulation resulted in a drop in the number of P2P platforms from more than 3,000 platforms in 2015 to 2,448 in 2016. Regardless of the impact on the number of operational platforms, the regulatory intervention was meant to support the industry by creating a transparent and level playing field for platforms, investors, and borrowers; it has not had adverse effect on the overall lending volumes.
The central government realizes the potential P2P lending has for the neglected retail financial segment, particularly in rural areas. It has been even experimenting with measures to leverage the industry to improve access to finance by the unserved and underserved. For instance, some authorities have carried out specific measures to promote rural development through P2P lending.
The Brief is written for researchers, development professionals, industry participants, and policy makers interested in crowdfunding and P2P lending, and how those phenomena have been playing out in China in the context of efforts to promote financial inclusion through digital financial services and FinTech. The Brief (i) provides an overview of the crowdfunding industry in China, with a specific focus on P2P lending, (ii) describes the wait-and-see approach, (iii) examines potential significance of P2P lending for financial inclusion, and (iv) outlines policy lessons gleaned from the development in China. It also includes a brief explanation of the terminology used in China to help readers avoid confusion and misinterpretation when trying to understand the market.