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

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 platforms

We 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.

P2P lending offers an example of integrated credit markets allowing researchers to examine the effects of new technologies on financial intermediaries. The project has relevance within and beyond banking institutions, at individual, national and international level. The project will increase academic and market understanding of borrower and lender behaviour.

Data about the operation of the loan application process is directly informative about the market structure (identifying, for instance, discrimination against certain groups of borrowers). This is valuable for Central Bank authorities and for anti-trust agencies.

Building on the 2015 guidance, regulators and lenders of the P2P market in China will substantially benefit from the proposed research results in developing a more detailed framework for the smooth functioning of the online lending market and improving the quality of lending decisions made.

Communication with beneficiaries is of key importance to disseminate research output and will continue throughout the project. Form and content of communication will be relevant to the interests/needs of the various user groups. Therefore, different methods, media and events will be employed to reach and to involve users. Key findings will be publicized by the use of social media to maintain contacts with a wide range of practising economists, journalists and students. Publicity via social media will create and maintain an awareness of the project's findings with a wide range of interested parties. There will be a particular attempt to communicate with the P2P users -people and businesses new to using financial services - who may increase the awareness of the associated costs and risks as well as the benefits of P2P. Links with electronic media will be maintained to ensure the dissemination of results and the chance to comment on relevant financial issues as they arise.


From the beginning of the project in 2017, we will operate a website, with a blog and regular updates, featuring interviews with researchers and UK and Chinese commentators e.g. economists, and personal finance specialists, informing them of findings and commenting on related current events.


Researchers will disseminate results during the project by attendance at academic conferences, including (UK - based) Royal Economic Society and the Money, Macro and Finance Research Group and (outside the UK) European Economic Association and European Finance Association. Conference presentations will help maintain a dialogue about the significance of the findings. The objective of exploring the effect of shocks on the P2P market will allow the presentation of work that is responsive to recent experience and contributes to awareness of international developments.

The workshops to be held in the UK and in China towards the close of the project in 2019 will include relevant researchers as well as invited guests. The latter will include lenders, regulators and policy makers, with an agenda of identifying the policy and practice significance of research findings, both in China and in other P2P markets in the US and the EU. As raised above, the project objectives include the identification of the effects of borrower misreporting behaviour on loan performance: the workshops will allow discussions on the findings to improve the practice in the industry. At the policy level, our project addresses the effectiveness of the regulation which is currently being implemented. The findings will be shared and discussed in the workshops to identify how the regulatory framework may be further developed to enhance its effectiveness.