Online Lending Platforms in China: Pure Informational Intermediary or Financial Intermediary?

This dissertation examines the current status, future development, and legal regulations of Peer-to-Peer online lending platforms in China. Chinese P2P online lending platforms not only provide an alternative source of funding for small and medium enterprises, but also bring investors more diversified investment opportunities. Until recently, most P2P platforms operated as financial intermediaries that pooled money from the public and then lent that money to individuals and small businesses. In recent years, however, the Chinese government decided that the financial intermediary model imposed too many risks on the country’s financial and social stability. Because of the growing number of P2P collapses, in 2015 the government prohibited this model and forced the platforms to adopt the information intermediary model instead.
This dissertation argues that the Chinese government should allow P2P lenders to play a financial intermediary role. Properly regulated, this model would bring more benefits than costs to the Chinese financial market. It would provide investment diversification and reduce investors’ screening and monitoring costs, and as financial intermediaries, P2Ps would fill an important need by providing retail investors with the advantages that result from the pooling of large numbers of short-term loans.
After legalizing the P2P lenders' financial intermediary role, the government should regulate these lenders rather than turn a blind eye to them, in order to mitigate the risks about which it is concerned. China should follow the U.S.’s example and expand the scope of its securities law to cover the financing methods of China’s P2P lenders. Securities regulation with information disclosure and anti-fraud rules would protect investors from being misled and defrauded. Imposing capital requirements, which are not currently in place, would prevent intermediaries from making risky investment decisions, absorbing operating losses due to borrower default. Effective mutual fund regulation, like the system in the U.S., can keep investors informed and deter platforms from making risky investments, so it is a good model for the Chinese government to consider as it evaluates the regulation of P2P online platforms. Together, these laws would mitigate the risks of these platforms’ collapse and allow the government to retain overall control of the operation of China’s financial institutions.