P2P Lending in China

As the peer-to-peer (P2P) industry in China continues to boom, many new players are entering the market and cross-industry partnerships are emerging. They are partnering with insurance companies, money market funds, real estate investors, and venture funds to expand the investment product offering on their platforms and attract investors. However, while the industry is thriving, its risk profile is also rising, with many lenders buckling due to borrower defaults.

P2P lending has been growing rapidly in China since 2007. This growth is marked by a significant increase in the number of platforms, investors, and monthly loan volume. Most recently, many lenders have begun to offer mortgage loans. Because the developers of these platforms are not classified as financial institutions, they are not required by the Central Bank of China to collect the standard 30 percent down payment on mortgage loans, making them a highly attractive option for many borrowers.

In fact, the Chinese government has, up to now, displayed a generally positive attitude toward such platforms, endorsing online financing innovation and creating policy that supports P2P lending. This has spurred a number of financial giants and entrepreneurs—who were long interested in online lending, but fearful of the policy risks—to build their own rival platforms.

Yet, despite the obvious upside to P2P lending, there is also a great deal of risk associated as well. As economic growth in China has begun to slow, many borrowers have defaulted on their loans, shutting down many lending websites. While this has mostly affected the smaller lenders, it is broadly indicative of China’s tightening monetary conditions and sets off warning bells for other lenders who may not have the organizational discipline and capital to withstand an ongoing pattern of defaults.

P2P lending has proven to be a highly dynamic and flexible platform to satisfy the growing demand for loans in China as the middle class grows and as consumerism overtakes the traditional conservative penchant for savings. Thus, the industry will likely continue to grow quickly. Nonetheless, as these lenders expand operations into new credit spheres, there will be increased need for thorough assessment of borrower reliability and for appropriate setting of loan terms. The most successful platforms will be those, which not only make it easy for consumers to access credit and which are technologically robust, but also demonstrate a good understanding of local market conditions and a rigor over the credit process.