Peer-to-peer lending market in China: pricing, risk management and regulation

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The project is an investigation of the Peer-to-Peer (P2P) lending market in China, the largest in the world. P2P lending is an online process where borrowers and lenders are matched directly without an intermediary. It has grown rapidly worldwide, with e.g. the UK market rising from £500 million in 2013 to £2.7 billion in 2015. The Chinese P2P lending market has some 3600 online lending platforms and loans totalling 980 billion yuan (£117.6 billion) in 2015. It is fuelled by a supply of funds from private investors and by demand both from individuals and from SMEs (estimated to make up to 40% of borrowers) for whom it fills a gap left by existing sources of funding. Many borrowers who use this platform have no previous experience of obtaining finance. A variety of on and offline processes are used in lending decisions by providers including new platforms and wealth management companies as well as banks. A guidance policy on regulation of the P2P sector was introduced in China in 2015, but concerns are still expressed about the incidence of failure in the growing sector, as a result of mismanagement and of fraud on the part of lenders. It is also recognised that the management of lending risks depends on verification of data reported by borrowers.The research project will look at all P2P credit applications to a major Chinese lender from its start-up in 2010 to December 2016 (some 800,000 in total), collecting all information provided by the borrowers in support of their applications. This includes both quantitative and qualitative data about their employment status, income, personal details, their credit histories and loan purposes. The data will enable us to examine how borrowers present themselves and the effect of this on lender behaviour - i.e. the conditions of loans offered. Using this data, the research will examine- The factors that influence lenders' decisions - who to lend to, what conditions to impose. How do lenders discriminate between borrowers? - How soft information about borrowers affects lenders' decisions. Does it improve their assessment of borrower risk?- Whether there is an incentive for borrowers to misrepresent their income in order to improve their chances of obtaining a loan or the terms offered. The project will examine whether misreporting by borrowers affects lender decisions and loan outcomes.- Whether lenders are affected by other lenders' decisions, and if so whether they are likely to operate rationally.- How information about external events (e.g. publicity given to frauds on lenders) as exogenous shocks affects borrower and lender behaviours.- How major regulation changes in 2015 have affected borrower and lender behaviours.The results of the project will be relevant not only to academic research in economics and finance, but also to interested parties including- Regulators of the banking sector- Economists and policymakers in financial supervision- Central bank authorities in China, and in the other developing and developed economies where P2P lending has increasingly become a significant activity- Providers of P2P platformsWe intend to communicate results effectively to all interested parties throughout the project using various means. In addition to presentation of papers at high-profile conferences and journal publication, we will use a dedicated website, social media, and electronic media. At the close of the project, two workshops will be held in the UK and China with invited academicians, lenders, regulators, policymakers to further discuss and identify the policy implications of the project's findings.