China Doesn’t Yet Have a Grip on P2P Lending Risks

falling domino

China’s online peer-to-peer (P2P) lending platforms have been falling like dominos. This has sparked investor panic, exposing deeper risks long hidden in China’s shadow finance sector. It is yet to be seen if Chinese regulators will be able to manage the risks and effectively regulate P2P in the same way they have done in other areas of shadow banking.

Chinese authorities have intensified their focus on financial risks over the past two years. Chinese President Xi Jinping demonstrated high-level support when he took the unusual step of chairing the National Financial Work Conference himself last July. Regulators have also found themselves able to better coordinate to manage regulatory blind spots and arbitrage thanks to the updated structure of financial regulation.

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Shadow banking from institutions supervised by empowered central regulators is shrinking. One of the best ways to measure shadow credit funded by banks is through their lending to nonbank financial institutions. It rose 80 percent year-on-year in February 2016, but over the last year has shrunk by 4 percent.

Central bank credit measures also suggest that core shadow banking channels (trust loans, entrusted loans and undiscounted bankers’ acceptances) have been shrinking for most of 2018. Plain renminbi loans from banks make up an increasing share of new credit. Though shadow finance tends to find ways around new rules, these figures suggest hard-won regulatory progress.

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