What Starts the Prairie Fire? An Analysis of Marketplace Lending in China: The Status and Driving Forces

Abstract

This article begins by reviewing the history of marketplace lending globally, with an emphasis on that of China, and then expounds on the development of the industry in China, its driving forces, and its future developments. The main findings suggest that marketplace lending has been developing rapidly in China and has become a barometer and integral part of the development of China’s overall Internet finance industry. However, China’s marketplace lending is still under regularization, with evident trends of polarization and sector concentration. The authors identify four driving forces that are propelling the development of China’s marketplace lending sector: long-term financial repression and inefficiency in China, technological innovation that facilitates financial efficiency and inclusive finance, the existence of policy dividends, and the presence of regulatory arbitrage opportunities. These forces ease pressure from financial demands, improve the efficiency of traditional finance, enhance capacity for technological innovation, and reduce policy dividends and regulatory arbitrage. The authors conclude by establishing the outlook for future developments in China’s marketplace lending industry under the new normal regulatory regime: The sector will enter a period characterized by a regularized regulatory regime, rationalized industry structure, maturing technologies, and internationally oriented development.

TOPICS: Fixed income and structured finance, emerging, legal/regulatory/public policy