As a new and growing financial service, peer-to-peer (P2P) lending in China is facilitating increased access to credit for underserved borrowers and attracting investors who seek higher returns. Regulation has not kept pace with expansion, however, resulting in an alarming number of defaults and cases of fraud. Banking institutions are also exposed to P2P risks, through both on- and off-balance sheet investments and by acting as custodians for existing P2P platforms.
While P2P financing is a comparatively small proportion of total credit in China’s economy, its ties to speculative bubbles, shadow banking, and overleveraged firms, coupled with a lack of transparency surrounding the scale of the market and creditworthiness of borrowers, make it a potential trigger of a credit crunch among individuals and small businesses, key components of China’s newer and service-oriented economy. Risks within P2P lending are also likely to be correlated with risks within other credit assets in non-bank financial institutions, with the potential for spillovers into the banking system itself.
