How does participative finance work in countries with distinctively different financial infrastructures? We look at how peer-to-peer (P2P) lending in China compares with the US.
When great ideas transcend cultural differences
P2P lending grew out of frustration with a banking system typical of western countries, one which has been described as geriatric and groaning under the weight of its own bureaucratic processes. In contrast, when nimble and progressive P2P lending sites arrived in China in 2009, they did so against a totally different financial context, with its own history and cultural norms. For example, the majority of SMEs and individuals in China are ineligible for financing from domestic banks, which are ill-equipped to provide capital. This is in stark contrast to the sophisticated business-lending infrastructure and credit culture that exists in the US. Family units still facilitate a lot of financial support between people. Still, a good idea is a good idea, especially when it functions via the borderless internet, the FinTech industry, high ideals of ‘free-formers’ and the global market. Observers have suggested that China may be able to simply ‘skip’ a generation of financial progress and move straight into the innovative world of economic disintermediation.
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Unique possibilities, corresponding challenges
Private money lenders in China have experienced unprecedented success and have overtaken the US market. A report in China News puts the 2015 figure for online-lending at $150 billion, (982.3 billion yuan) – almost four times that of its American counterpart. The potential for micro-lending in the country is enormous, but though pent-up demand created by the less-developed system surpasses that of the US, fraud, effective regulation and accurate risk assessment are larger problems in the Chinese market. Though the China Banking Regulatory Commission (CBCR) has announced new regulations to help steer the ‘industry’s development on a more sustainable path’, private money lenders that emerge on the Chinese market are more likely to collapse than in the US, often due to their inability to cover defaulted loans. Default rates are higher too. For America’s Prosper it stands between 1%-2%, compared to 2%-3% for China’s Ppdai.com. This suggests that the independent third-party credit evaluations that are key to banking in the USA play an important role in reducing default rates. Chinese platforms often accrue higher overheads through the use of stores or agents to acquire customers and run credit checks. In light of the recent events linked to fraudulous activites of the chinese platform Ezubao, that caused more than €7billion$ of losses to its investors, the regulation of the local market became of the outmost importance.