4 Reference: Dingwei Gu, Zhengqing Gui, and Yangguang Huang, “Why did the Peer-to-peer Lending Market Fail in China?” Working Paper (2021). Yangguang (Sunny) Huang is Assistant Professor of Economics at the Hong Kong University of Science and Technology. He is also a research affiliate at the Center for Economic Policy and faculty associate of the Division of Public Policy and Institute of Emerging Market Studies at HKUST. Sunny received his Ph.D. in Economics from the University of Washington, Seattle. His research areas are Industrial Organization and Applied Microeconomics. The theme of his research is combining economic models and econometric techniques to study policy-oriented topics. His research projects tackle problems in auction, procurement, corruption, financial development, digital economy, online markets, and innovation policy. RECOMMENDATION 1. Excessive competition among P2P platforms can jeopardize investors interest and social welfare. It is important to enhance regulatory capacity. For example, to prevent platforms from absconding with investors' money, platforms should establish custody accounts with commercial banks and perform transaction through banks. 2. If the regulator cannot substantially increase its regulatory capacity in the short run, one way to avoid excessive competition is to raise the barriers to entry to control the P2P market at a modest level of competition. For example, the US Securities and Exchange Commission issued detailed rules on how existing laws on securities were to be applied to P2P lending platforms. 3. Providing financial literacy education and informational nudges can improve investors' awareness of the risk of platform collapse and financial fraud. For example, one major regulatory goal of the UK Financial Conduct Authority is to ensure that retail investors are fully aware that lending on P2P platforms is not like bank deposits. 4. In the long run, expanding the credit scoring system can fundamentally reduce the risk in P2P lending markets. In developed countries, individuals and small firms can earn credit records through mature a credit scoring system. As a result, the P2P market is very small relative to the entire credit market in these countries. However, in China, there is no universal credit scoring system for individuals and small firms. P2P platforms attract borrowers with high risk and weak credit records. SPRING 2022 NO.61 / THOUGHT LEADERSHIP BRIEF Read all HKUST IEMS Thought Leadership Briefs at http://iems.ust.hk/tlb T: (852) 3469 2215 E: iems@ust.hk W: http://iems.ust.hk A: Lo Ka Chung Building, The Hong Kong University of Science and Technology, Clear Water Bay, Kowloon With Support from
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