01/2012 01/2013 01/2014 01/2015 01/2016 01/2017 01/2018 01/2019 01/2020 3,000 2,500 2,000 1,500 1,000 500 0 No. of platforms SPRING 2022 NO.61 / THOUGHT LEADERSHIP BRIEF 2 Figure 1 shows that P2P platforms can provide loans at lower interest rates than private lending without the platforms. For lenders, investing via P2P platforms did not require large amounts of money or a long duration, and the interest rate was much higher than those offered by banks. The rapid development of information and financial technology and the unmet demand for credit gave rise to a large P2P credit market in China. From 2007 to 2020, China's P2P lending market experienced a drastic boom and bust. The market started to flourish in 2013 and reached its peak transaction volume of CNY 2.8 trillion in 2017. Thousands of P2P platforms connected over 4 million lenders and borrowers and provided billions of loans to individuals and small- and medium-sized enterprises (SMEs). At its peak, the total amount of P2P lending in China was 10 times greater than that in the US. From 2013 to 2018, the P2P trading volume in China was larger than the sum for the rest of the world. Despite that the P2P lending market had promoted financial inclusion in China, it was highly risky and volatile. Instances of platform collapse and fraud occurred frequently, causing substantial monetary losses for millions of individual lenders. As investors gradually lost confidence in P2P lending, the market size continued to decline and ultimately collapsed. On November 27, 2020, the China Banking and Insurance Regulatory Commission (CBIRC) announced that the number of P2P platforms had fallen to zero. However, P2P lending is still an active industry in the US and other developed economies. What are the differences between the Chinese P2P market and those in the developed countries? We develop a theoretical model of the P2P lending market that explains how different market environments can lead to two vastly different outcomes. Why did so many P2P platforms collapse in China, while most platforms in developed countries were able to persist? ASSESSMENT The major reason is that China's P2P platforms deviated from being information intermediaries and started to offer principal guarantee terms. A classical P2P lending platform serves as an information intermediary that provides information about borrowers without taking liability for borrower default. However, the role of P2P platforms in China started to change after 2012 as the competition among platforms became increasingly intense. To compete for funds from lenders, platforms offered principal guarantee to lenders that promised to repay the principal to lenders even if borrowers defaulted. As a result, platforms took on the responsibility for borrower default and exposed themselves to credit risks that were thus shifted away from lenders. By 2016, almost all platforms had become shadow banks. Figure 1. Interest Rate Comparison in China Table 1. Total Amount of P2P Lending (million USD) Figure 2. Monthly Number of Active P2P Platforms in China Country 2013 2014 2015 2016 2017 2018 China 5520 23,820 97,580 201,310 327,800 207,590 USA 3176 8742 21,282 23,420 17,340 27,420 UK 751 2135 3667 4810 6005 6359 Japan 79 108 326 171 236 873 Germany 48 116 205 227 448 813 France 57 117 181 277 431 494 Australia 2 16 70 165 365 321 New Zealand 14 245 178 242 222 Sources: Cambridge Centre for Alternative Finance. Sources: WDZJ (www.wdzj.com), People's Bank of China, and Wenzhou Municipal Government Finance Office. Wenzhou index is the interest rate of private lending estimated by Wenzhou government (www.wzpfi.gov.cn) P2P interest rate Wenzhou index Benchmark interest rate Interest rate (%) 25 20 15 10 5 0 01/2014 01/2015 01/2016 01/2017 01/2018 01/2019
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