The Rise of P2P Lending in China

8/20/2019 The Rise of P2P Lending in China

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The rise of peer-to-peer lending

in China:An overview andsurvey case study


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About ACCA

ACCA (the Association of Chartered CertifiedAccountants) is the global body for professionalaccountants. It offers business-relevant, first-choice

qualifications to people of application, ability andambition around the world who seek a rewardingcareer in accountancy, finance and management.

ACCA supports its 178,000 members and 455,000 students in 181 countries, helping them to developsuccessful careers in accounting and business, with theskills required by employers. ACCA works through anetwork of 92 offices and centres and more than7,110 Approved Employers worldwide, who providehigh standards of employee learning anddevelopment. Through its public interest remit, ACCApromotes appropriate regulation of accounting andconducts relevant research to ensure accountancy

continues to grow in reputation and influence.

Founded in 1904, ACCA has consistently held uniquecore values: opportunity, diversity, innovation, integrityand accountability. It believes that accountants bringvalue to economies in all stages of development andseek to develop capacity in the profession andencourage the adoption of global standards. ACCA’score values are aligned to the needs of employers inall sectors and it ensures that through its range ofqualifications, it prepares accountants for business.ACCA seeks to open up the profession to people ofall backgrounds and remove artificial barriers,

innovating its qualifications and delivery to meet thediverse needs of trainee professionals and theiremployers. More information is available at:www.accaglobal.com

© The Association of Chartered Certified AccountantsOctober 2015

China’s peer-to-peer

lending sector hasemerged as the largestand most dynamiconline alternativefinance sector in theworld. This reportexplores the emergence,characteristics andevolving policyenvironment of peer-to-peer lending in Chinaand presents detailedfindings from a surveyof borrowers andlenders using China’sfirst online directpeer-to-peer lending

provider, Paipaidai.


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Contents

About the authors ..........................................................................................................................4

1. Executive summary ...................................................................................................................5

2. The growth of peer-to-peer lending in China ..............................................................7

3. Financial innovation and peer-to-peer lending in China .........................................9

4. A typology of China’s peer-to-peer lending providers.......................................... 11

5. Survey findings from Paipaidai borrowers and lenders .........................................15

6. China’s peer-to-peer lending regulatory framework ..............................................20

7. Conclusion .................................................................................................................................21

Appendix 1: SME classifications in China........................................................................ 22

References ......................................................................................................................................23


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LUKE DEER

Luke Deer is a post-doctoral research associatewith the Department of Political Economy at the

University of Sydney and a research associatewith the University of Cambridge Centre forAlternative Finance and the Cambridge JudgeBusiness School. Luke’s research interests arein understanding the emergence and dynamicsof alternative finance in China.

JACKSON MI

Jackson Mi is an assistant professor infinance at the Shanghai Maritime Universityand a postdoctoral research fellow atFudan University in Shanghai. Jackson’sdoctoral research was on informal finance inChina and his research interests include

micro-finance, peer-to-peer finance andnetwork finance.

YU YUXIN

Yu Yuxin is a lecturer in the School of Economicsand Finance at Shanghai International StudiesUniversity. Yuxin’s research interests are inChina’s financial markets and macro-economy,and in applications of big data, especially topeer-to-peer finance. He has been a visitingscholar at Virginia Tech (Virginia PolytechnicInstitute and State University) in the US.

ACKNOWLEDGEMENTS

The research team would like to thank the industry participants inChina who spoke with the research team about the sector and their

provider details. Special thanks are due to Bai Dengyu at the ChinaAssociation of Microfinance (CAM) for sharing his views and arrangingintroductions with industry participants, as well as Zhang Jun and HuHonghui at Paipaidai, Barry Freeman at Jimubox, Pan Jing atDianrong, Tang Nan at RenRenDai and Chen Huan at CreditEase.

The research team would particularly like to thank Charlotte Chungfor her support in getting this report under way, Emmanouil Schizasfor his feedback on the research proposal and survey design andWalter Wu for arranging interviews in Beijing.

About the authors 4


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5

China’s peer-to-peer lending market hasbecome the largest in the world. The rapidgrowth of online peer-to-peer lending inChina has been driven by the supply of funds

from retail investors and by the demand foraccess to finance from individuals and fromthe owners of small and micro businesses. Byapplying innovations in alternative finance,peer-to-peer lending in China is creating newchannels of credit information and increasingaccess to finance. Over half the borrowersfrom peer-to-peer lending providers whowere surveyed for this report said they had noprevious history of borrowing from traditionalfinancial institutions, credit societies or otherentities. Half the borrowers surveyed also saidthat their main reason for borrowing was to‘accumulate credit worthiness’. China’sgovernment has supported the continuedgrowth of ‘internet finance’, includingpeer-to-peer lending and equitycrowdfunding, while introducing ‘moderatelyloose regulatory policies’ (PBOC 2015a).

SIZE AND COMPOSITION OF LENDING

While as yet there is no verifiable data on thevolume of peer-to-peer lending in China, bythe end of 2015 it could be as high asUS$20bn–40bn.1 Retail investors are theprimary funding source for peer-to-peerlending in China. The present researchsuggests that business borrowers, who aremostly owners of small or micro businesses,and some owners of medium-sizedenterprises, could make up between 20%and 40% of peer-to-peer lending borrowersin China. This indicates a much higher shareof peer-to-peer business lending in Chinathan is the case in developed markets, whichhave been dominated by peer-to-peerconsumer lending.2

CREDIT ENVIRONMENT AND DIVERSEPROVIDER MODELS

China’s credit and banking environment isalso quite different to that in developedcountries and this has contributed to a widerset of peer-to-peer lending provider modelsin China than in other countries. One reasonis the diverse origins of peer-to-peer lendingproviders in China. Although there areperhaps a minority of dedicated onlinetechnology providers, a large number ofhybrid wealth-management companies andinformal banks have entered the sector. These

tend to use more conventional creditallocation processes. At the same time,because of the relative lack of available creditinformation, most direct peer-to-peer lending

platforms in China also tend to rely muchmore on offline processes.

SURVEY FINDINGS

This report also presents findings from theACCA’s own detailed survey of 935 borrowersand lenders from China’s first online directpeer-to-peer lending company, Paipaidai.Paipaidai started offering unsecured onlinepeer-to-peer micro-loans in 2007, initially tosmall e-commerce ‘TaoBao’ shops. By 2015,Paipaidai claimed over 1,200,000 activemembers, i.e. borrowers and lenders.According to Paipaidai’s founders, in the

year to mid-2015, 42% of its borrowerswere business borrowers and 58% werepersonal borrowers.

INDIVIDUAL BORROWER SURVEYRESPONSES

The demand for easier access to credit hasbeen a key reason for the rapid growth ofpeer-to-peer lending in China. According tothe survey findings, for example, of thoserespondents borrowing through Paipaidai:

• 87% selected the “low borrowingthreshold and easy borrower audit

process” as their main reason forborrowing through a peer-to-peer lendingprovider such as Paipaidai

• 56% said that they had no previousborrowing history from other financialinstitutions such as a traditional banks orcredit societies

• 51% said that their main reason forborrowing funds from a peer-to-peerlending provider such as Paipaidai was ‘toaccumulate credit worthiness’.

This last finding, about borrower motives,suggests that borrowers’ demand for morefavourable access to credit mitigates some ofthe risk of default from unsecured lending.Online peer-to-peer lending creates newforms of information transparency and with itincentives for borrowers to meet theirrepayments in order to secure a positiveonline credit history.

1. Executive summary

China’s peer-to-peerlending market has

become the largest inthe world.

1 According to data published by WangDaiZhiJia (网贷之家), an online news site covering the peer-to-peer sector, the total transaction size of peer-to-peer lending in Chinaat the end of 2014 was almost RMB253bn (about US$40bn). Authors’ calculations based on data from www.wangdaizhijia.com

2 See Wardrop et al. (2015: 17) for data on peer-to-peer business lending in the UK and Europe.


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INDIVIDUAL INVESTOR RESPONSES

The supply of funds from individual retailinvestors is a key reason for the growth of

peer-to-peer lending in China. By lendingthrough peer-to-peer providers, investorshave been able to get returns three to fivetimes higher than the bank deposit rate. Mostindividual lender respondents to the survey(57%) said they usually bid for loans withinterest rates in the 12% to 18% range.

The most common decision factors given bylender respondents when making their bidson the Paipaidai platform were:

• the borrower’s credit rating (72%)• Paipaidai’s loan security guarantee (72%)• the interest rate level of the loan (52%)

• the borrower’s certification status (51%).

Most lender respondents to the survey alsosaid they were carrying out investments ontheir own behalf (85%), with the remainderinvesting on behalf of themselves and closefamily or friends.

THE EVOLVING POLICY ANDREGULATORY ENVIRONMENT

After allowing some years of rapid growth inpeer-to-peer lending and other forms ofinternet finance, China’s central governmentintroduced a broad internet finance

‘guidance’ policy framework in July 2015. This‘guidance’ policy encourages the growth anddevelopment of internet finance, includingpeer-to-peer lending and equitycrowdfunding, while introducing relativelylight regulatory measures. The key

requirement for peer-to-peer lendingproviders is that they must now hold borrowerand lender funds in custodian accounts with‘registered financial institutions’. This change

raises the hurdles for providers and it is likelyto lead to some consolidation, while securingthe future growth of peer-to-peer lending.

REPORT METHODS

This report explores the rise of peer-to-peerlending in China to give SME communitiesand organisations around the world a betterunderstanding of peer-to-peer lending andother forms of alternative finance as a viableoption for their financing needs. This reporttakes a qualitative approach to analysis and isbased on ACCA’s primary research andsecondary Chinese language sources.

The primary data comes from the researchteam interviews with industry participants inChina and from the primary research surveymentioned above. Interviews were conductedwith representatives from five peer-to-peerlending providers in China: Paipaidai,Jimubox, Credit Ease, Renrendai andDianrong, and with the CEO of the ChinaAssociation for Microfinance (CAM), agovernment-industry umbrella associationcovering peer-to-peer lending providers.

The online survey, carried out amongborrowers and lenders who use the peer-to-peer lending provider Paipaidai, provided anunderstanding of their experiences,motivations and decisions. The surveymethods and findings are explained in moredetail in Chapter 5 of this report.

6The rise of peer-to-peer lending in China:An overview and survey case study

1. Executive summary

57%of individual lender respondentsto the survey said they usually bidfor loans with interest rates in the12% to 18% range.


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China’s online peer-to-peer lending sector hasundergone extremely rapid growth in recentyears. While there is as yet no verifiableindustry-wide data on the volume of peer-to-

peer lending in China, secondary estimatesare in the range of US$20bn–40bn for 2014 –which makes China’s peer-to-peer lendingsector the largest in the world.3 The numberof providers has grown considerably since2007, when China’s first unsecured peer-to-peer (P2P) lending platform, Paipaidai, startedoperating. By the end of 2011, 50 providerswere reported to be operating and this hadclimbed to over 1500 providers by the end of2014 (Figure 2.1). While the headline figuresare impressive, more detailed verifiableresearch about the volume and compositionof peer-to-peer lending is needed to get acomplete picture of the sector’s impact onfinancing dynamics in China.

Peer-to-peer lending has the potential totransform the mass banking model in Chinaby making it easier for the great majority ofborrowers, who have low net-worth and areborrowing relatively modest amounts, toaccess finance. To take one example, over halfthe Paipaidai borrowers surveyed (Chapter 5)said they had no previous history of borrowingfrom traditional financial institutions such asbanks, credit societies or other entities. In theyear to mid-2015 Paipaidai claimed to haveover 1.2m active members – of which 527,637

were individual borrowers, so potentiallythere could be 250,000 new borrowers on asingle platform with no previous history ofborrowing from traditional financialinstitutions or credit societies.

PEER-TO-PEER LENDING IS FILLING AN‘INSTITUTIONAL GAP’ IN CHINA

A related question is the composition of peer-

to-peer lending in China. Whereas peer-to-peer consumer lending has dominateddeveloped country markets, there seems tobe a much higher share of peer-to-peerbusiness lending in China. The presentresearch suggests that peer-to-peer businesslending could be in the range of 20% to 40%of all peer-to-peer lending in China.4 Onereason for such a high share of peer-to-peerbusiness borrowing in China is the large‘institutional’ gap in the supply of finance tosmall, medium and micro enterprises (Shi etal. 2010: 4).

This estimate is based on the research teams’

interviews with provider representatives,including PaiPaiDai, Dianrong and Jimubox.These platforms all started completelyfocused on lending to SMEs (including tomicro enterprises) and in 2014 theseplatforms reported that their share of P2Pbusiness lending was in the range of 40% toover 50% of their total financing (see section4). While this share of P2P business lendingmay be high compared to some otherplatforms in China, given the constraints onsmall and micro enterprising financing fromtraditional banks in China we expect theshare of P2P business financing in China ishigher than in markets with more developed

SME banking systems. Further industryresearch on the shares of P2P consumer andP2P business lending across the sector inChina is needed verify this estimate.

China’s online peer-to-peer lending sector has

undergone extremely rapidgrowth in recent years.

2. The growth of peer-to-peer lending in China 7

Figure 2.1: The number of peer-to-peer lending providers in China

1800

1600

1400

1200

1000

800

600

400

200

0

C o m p a n i e s

2013 20142012

800

1575

200

3 Authors’ estimates based on data from the online media portal wangdaizhijia.com 网贷之家.

4 The estimate that 20%-40% of peer-to-peer financing in China is peer-to-peer business financing is the authors’ estimate based on the research teams’ interviews withprovider representatives, including PaiPaiDai, Dianrong and Jimubox. These platforms all started completely focused on lending to SMEs (including to micro enterprises)and in 2014 these platforms reported that their share of P2P business lending was in the range of 40% to over 50% of their total financing (see section 4). While this shareof P2P business lending may be high compared to some other platforms in China, given the constraints on small and micro enterprising financing from traditional banks inChina we expect the share of P2P business financing in China is higher than in markets with more developed SME banking systems. Further industry research on theshares of P2P consumer and P2P business lending across the sector in China is needed verify this estimate.

Source: based on data from wangdaizhijia.com


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2. The growth of peer-to-peer lending in China

Since the start of the policy era of market‘reform and opening’ in the 1980s, a fewmassive State-Owned Commercial Banks(SOCBs) have dominated China’s financial

system. For most of their recent history, theselarge banks have predominately financedlarge state-owned enterprises andgovernment-related borrowers. In contrast,the mass of the small, micro and medium-sized enterprises have relied on‘bootstrapping’ from their own earnings andhave tended to borrow from informalchannels, especially from friends, family andbusiness associates. Despite changes in thepattern of commercial bank financing inChina over the past decade (Lardy 2014),there remains a large ‘institutional gap’ in thesupply of finance to smaller enterprises,individuals and households (He et al. 2013).

At the same time, new financing channelshave emerged out of the massive growth ofe-commerce in China. For instance, by 2013there were over 16m participating vendorbusinesses on the business-to-consumeronline trading platform Taobao, the vastmajority of which were small and micro-enterprises (Shrader 2013).5 Among thepeer-to-peer lending providers interviewed,Paipaidai, Dianrong and Jimubox also startedlending solely to small, micro or medium-sizedenterprise borrowers before they diversifiedinto peer-to-peer consumer lending.6

In addition to small and micro enterprisefinancing, there is also demand from medium-sized enterprises at the larger end of the SMEscale in China (these are much larger than

their counterparts in more developedmarkets) for alternative financingarrangements.7 Larger small and medium-sized enterprises that are seeking moreflexible loan term and repayment structuresthan have been offered by traditional bankshave generally turned to informal ‘shadowbank’ financing (He et.al. 2013). Yet thedevelopment of large-volume peer-to-peerbusiness lending has the potential to meet agrowing share of this demand for medium-sized enterprise financing. One example of apeer-to-peer lending provider specialising inthis area, Jimubox, is discussed in Chapter 4.

Many peer-to-peer lending providers havealso moved into consumer financing byoffering a diversified range of lendingservices in areas where the traditional bankshave been too slow and too cumbersome tooperate – such as consumer credit, carfinancing, education and training, as well asmortgage financing. More detailed andverifiable research is required to get acomplete picture of the changing financingcomposition of peer-to-peer lending in China.

5 Taobao (淘宝) is the online business-to-consumer retail platform of the e-commerce giant Alibaba.

6 For more details see the provider examples in Chapter 4.

7 Classifications for SMEs in China vary by broad industry type (e.g. primary, manufacturing, retail and wholesaling) which makes direct comparisons across sectors difficult.For example, in manufacturing a small enterprise in classified as having between 20 and 300 employees and an operating revenue of between RMB3m-RMB20m. Yet asmall retail enterprise is classified as having between 10 and 49 employees and an operating revenue of between RMB1m-RMB5m. For details see Appendix 1.

More detailed andverifiable research

is required to get acomplete picture ofthe changing financingcomposition of peer-to-peer lending in China.


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Online peer-to-peer lending is a financialinnovation that has been rapidly diffused andadapted in China. This chapter looks atACCA’s framework for conceptualising the

types of financial innovations involved inpeer-to-peer lending and how they havebeen adapted in China. This frameworkconsiders financial intermediation through anunderstanding of how four intermediate‘financial’ inputs are combined or applied tomeet financial needs (ACCA 2014a).

These four ‘intermediate’ financial inputsare information, control, collateral and risk(Figure 3.1). Different ‘financial technologies’combine or apply these four intermediateinputs in different ways. Financial innovationcan therefore be understood as new – andusually more ‘efficient’ – ways of producing orapplying these financial inputs to meet new orexisting financial requirements or needs (ibid).

Below is a discussion of how peer-to-peerlending models in China produce andcombine three of these intermediate financialinputs: information, collateral, and risk.

INFORMATION

‘Information includes any informationthat can be used to infer the risk orreturns involved in a project in needof financing. This can be financial or

non-financial, “hard” or “soft”, highlystructured or unstructured, internallygenerated or bought-in. It can beembedded in risk or valuation models, orsifted from rumour and word-of-mouth.’ 8

Online peer-to-peer financing entails aninnovation in the way in which ‘information’

inputs are produced and applied. Economistshave long held that banks and individuallenders face large transaction costs inlending to small borrowers because of the

relatively high ‘information asymmetries’arising from the lack of detailed informationavailable to the lender about the capacityand the willingness of small and especiallyunsecured borrowers to repay loans.Peer-to-peer lending technologysubstantially reduces these ‘informationasymmetries’ by pooling small borrowers andaggregating their loan-bid and existingcredit information. In China, peer-to-peerlending providers are able to bring in andsystematise existing credit and credit proxyinformation from a range of online third-partyproviders, including:

• records of existing personal or businesscredit information from traditional andnon-bank financial institutions, includingcredit information from the central bank’snational credit-registry system and‘movable assets’ registry information foraccounts receivables

• personal ID checks on individual borrowersor fundraisers with the local police bureauand via social media profile registrations

• data on the recent trading history ofindividual business borrowers, such as their

e-commerce or ‘Taobao’ trading history.

Peer-to-peer providers also produce newforms of credit information by aggregatingand listing current loan-bid details, previousborrowing histories, and ideally the numberof current bids in a real-time onlinemarketplace. Mobile credit assessment teamsalso speed up offline information collection.

Online peer-to-peerlending is a financial

innovation that has beenrapidly diffused andadapted in China.

3. Financial innovation and peer-to-peerlending in China

9

Figure 3.1: ACCA’s Four Inputs Framework

Source: ACCA 2014a

8 The definitions for the four intermediate inputs: information, collateral, control and risk, quoted in bold in this section are from ACCA (2014a).

Capital Labour

Financial technology

Information RiskCollateral Control

Financial services

Investment Savings

Financial technology


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3. Financial innovation and peer-to-peer lending in China

Decision making (i.e. resource allocation) alsoinvolves transaction costs, especially time. Indirect peer-to-peer financing, the costs ofevaluating and making decisions about

whether to lend or not, and on what terms,are borne by individual lenders, rather thanby bank credit officers. Financial decisionmaking in peer-to-peer lending thereforereduces the amount of time it takes tocontract loans because it distributes decisionmaking time across a large number ofindividual lenders rather than a few loanofficials, and it expands the potential scale oflending. Online platforms can also reduce thehigh fixed costs of traditional bank branch-office networks.

COLLATERAL

‘Collateral includes any assets that canbe used in order to compensate investorsfor losses. This can range from personalguarantees to real estate and equipmentowned by the business, and can alsoinclude intangible assets such asintellectual property (IP). Collateral andControl inputs can often overlap, insofaras pledged collateral motivates businessowners or management to deliver thepromised returns to investors.’ 9

Peer-to-peer providers on both the investor(lender) and borrower sides in China usecollateral.

Collateral pledged by providers tocompensate investorsMost peer-to-peer lending providers in Chinahave so far offered investors outright orconditional guarantees on their investmentprincipal and, in some cases, have evenguaranteed interest rate returns to investorsas well. These practices may end under thecurrent government regulatory framework.

New forms of collateral provided byborrowers

Personal, small, and micro enterpriseborrowers tend to have limited tangibleassets that can provide collateral. Tangibleassets enable a form of trust, which isessential for financial contracting. As withtraditional forms of lending, borrowers withtangible assets can borrow greater amounts

on terms that are more flexible. Peer-to-peerfinancing providers may seek to verify thetangible assets of potential borrowersthrough physical site visits. An importantinnovation in collateral inputs in China hascome from the development of a regulatoryinfrastructure for ‘movable assets’ by thePeople’s Central Bank of China (PBOC). ThePBOC launched an online asset registry for‘accounts receivables’ in 2007, which enablesshort-term loans to be secured againstspecific receivables (known as ‘movableassets’) (ACCA 2014b).

There has been a substantial rise in theshare of lending to SMEs from bothtraditional and non-traditional financialinstitutions since the establishment of China’snational ‘movable assets registry’ (Love et al.2013). Yet because peer-to-peer lendingproviders are not ‘registered financialinstitutions’, they have not had easy accessto the online credit registry informationsystem until recently (Jiang 2015). Moreover,many potential enterprise borrowers aresimply not registered.

Unsecured lending, which is offered by manypeer-to-peer lending providers, also relies on

trust generated through intangible collateral,mostly in the form of the reputational ‘capital’of borrowers. The survey findings (Chapter 5)show that individual borrowers may seek toaccumulate a favourable credit history bycreating a record of loan repayment viarepeated peer-to-peer borrowing.

RISK

‘Risk refers to investors’ willingnessto take on risk, as well as their ability

to manage, diversify and terminatetheir exposure. The simplest “Risk”input is the participation of new, morerisk-loving investors in a market. Morecomplex inputs include the services ofinvestment managers or the presence ofliquid secondary markets.’ 10

Peer-to-peer lending involves an innovation inrisk by transferring credit risk from financialinstitutions and dispersing it amongindividual lenders. Indeed, peer-to-peerlending is a new low-threshold investmentchannel for retail investors in China. The

emergence of investor-herding, as more andmore investors pour into the marketexpecting guaranteed returns, is a risk forproviders and for the sector, because mostproviders have a much lower capital-to-loanbuffer ratio than traditional banks to coverany sharp rise in borrower default rates.

Investors are encouraged to diversify andspread their exposures by investing smallamounts across a large number of individualloans. The providers interviewed havedeveloped different mechanisms formanaging high levels of investor risk byseeking to educate investors on

diversification. Some providers have alsodeveloped automated investment anddiversification mechanisms and some makeloan guarantees conditional on investors’sufficient diversification of their lending.

The development of liquid secondary marketsfor trading outstanding loan contracts isanother way in which providers seek tomitigate risk for investors. Liquid secondarymarkets mitigate the problem of liquiditymismatch (arising from the different liquiditypreferences of borrower and lenders) in whichborrowers tend to prefer longer loan termsthan investors. Investors in liquid secondary

markets can manage and terminate theirexposure by selling primary loan contractsbefore the loan reaches maturity. More liquidsecondary markets allow investors to managetheir exposure more easily, encouraging morelenders, and it lowers the cost of credit, whichencourages more borrowers into the market.

9 ACCA (2014a).

10 ACCA (2014a).

Peer-to-peer lendinginvolves an innovation

in risk by transferringcredit risk from financialinstitutions anddispersing it amongindividual lenders.


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11

China’s peer-to-peer lending sector has a morediverse set of provider models than is the casein the US, UK or elsewhere. The differences inprovider models arise from the diverse

provider origins and from different providerresponses to the challenges of limited creditinformation, the nature of investor risk anddifferent borrower segments. Because of therelative lack of reliable credit information,peer-to-peer lending providers in China tendto rely much more on offline processes.

The rapid growth of peer-to-peer lendingafter 2012 was part of the rapid growth of the‘shadow banking’ system. Some majorproviders are really hybrid non-traditionalwealth-management companies withpeer-to-peer lending businesses, while somelocal providers of peer-to-peer lending haveemerged from small informal banks. Possiblyonly a minority of peer-to-peer lendingproviders currently operating in China werestarted as dedicated peer-to-peertechnology-based lending companies.

A TYPOLOGY OF PEER-TO-PEERLENDING MODELS

Peer-to-peer consumer and peer-to-peerbusiness lending are common in China. Inaddition to borrower type, the typology ofpeer-to-peer lending models in China used inthis report (Figure 4.1) captures three otherdistinctions – whether the provider model isbased on direct peer-to-peer or indirectlending, the use of new financial technology-based processes or more conventionalcredit-assessment processes, and the role ofonline or offline processes. These distinctionsare explained below and illustrated throughprovider examples.

DIRECT PEER-TO-PEER LENDING

Direct peer-to-peer lending entails directfinancial contracting between individualborrowers and individual lenders. RenRenDai,Paipaidai, Jimubox and Dianrong areexamples of direct peer-to-peer lendingservice providers in China.

POOLING AND INDIRECT LENDINGMODEL

Under indirect peer-to-peer lending, thefinancial contracts are not made directlybetween individual lenders and borrowers;

instead, the providers assign credit toborrowers from pooled investor funds, whichmay have also undergone some form offurther asset transformation. The combination

of investor guarantees and the risktransformation involved in this model meansthat the risks entailed are less transparentthan in direct lending models.

NEW FINANCIAL TECHNOLOGY-BASEDPROVIDERS

Another distinction in China is whether theproviders are new financial technology-basedproviders or whether their ‘financialtechnology’ is based on conventional creditallocation processes with an online ‘shop-front’.Paipaidai, Jimubox and Dianrong are examplesof new financial technology-based providers.

WEALTH MANAGEMENT COMPANIES

A number of prominent peer-to-peer lendingproviders in China are also primarily wealth-and asset-management companies, engagedin several lines of business. One of the largestis Lufax, which was founded in 2011 as asubsidiary of China’s largest insuranceprovider, PingAn insurance. Alongsidepeer-to-peer lending, Lufax runs a majorsecondary trading business and raisescorporate finance through securitisation.Credit Ease is another major wealth-management company with a peer-to-peer

lending business. Informal small bank lendersalso operate hybrid business models thatoffer a range of ‘wealth management’services alongside ‘peer-to-peer lending’.

ONLINE VERSUS OFFLINE PROCESSES

Cutting across these models is the use ofonline and offline processes. The ways inwhich peer-to-peer lenders in developedmarkets lend money tend to be much closerto pure online financial contracting modelsbased on new financial technology anddetailed external credit-ratings data. Incontrast, peer-to-peer lending providers in

China tend to rely much more on offlineprocesses. On the borrower side, thisdifference is explained by the relative lack ofcomprehensive credit information, whichmeans there is a greater role for providers inoffline credit investigations. Providers inChina also tend to use offline processes toeducate and consult with individual investors.

4. A typology of peer-to-peerlending models in China

China’s peer-to-peerlending sector has a more

diverse set of providermodels than is the case inthe US, UK or elsewhere.

Table 4.1: A typology of peer-to-peer lending provider models in China

Direct lending Indirect lending

TypesMostlyoffline

Online &offline

Online &offline(technology

based)

Mostlyonline(technology

based)

Pooling &tranching

Providerexamples

CreditEase

RenRenDaiJimubox,Dianrong

PaiPaiDai Lufax

Source: Report authors. Note: Lufax has both direct peer-to-peer lending and large volume indirect lending businesses.


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PROVIDER CASE STUDY EXAMPLES

Mostly online – ppdai.com (拍拍贷)Paipaidai began operation in 2007 as the first

direct peer-to-peer technology-based lendingcompany in China. Paipaidai is the closest toa pure online lending model and is based onlending small and micro loans to onlineborrowers. The total registered membershipwas around 1.2m people between 2014 and2015. Over half its members are under 30years old and over 80% are male. Paipaidaihas experienced 200% growth over the pastfive years, and by mid-2014 its totaltransaction volume was over RMB1.4bn.11

In an interview, Paipaidai co-founders ZhangJun and Hu Honghui described how, inPaipaidai’s lending model, borrowers submit

an online loan application to Paipaidai, whichincludes the borrower’s personal information(photo ID, address, and phone number).Paipaidai then verifies borrower’s information,holds an online video chat with the borrowerto ask follow-up questions and then assigns acredit rating to the borrower. Where borrowershave an online trading history, their data andcredit information are relatively easy to verify.The borrower’s loan request is then posted asan auction-style listing on Paipaidai’s website.Investors can view all borrower listings onlineand pick the investments that match theirportfolio. Paipaidai will guarantee theinvestor’s principal if they have fully diversified

their investment portfolio.

Mostly offline – CreditEase.cn (宜信)Some providers rely much more heavily onoffline processes to source borrowers andlenders, using a network of local offices, toverify credit information and to contractlending. Credit Ease fits this model. CreditEaseis a wealth-management company with amostly offline peer-to-peer lending business.CreditEase started its lending business in2006 by lending small loans to students in atechnical and training agency. CreditEaseworks with offline third-party agencies to findborrowers and lenders, and has openedoffline branches in most major cities.

In an interview, Chen Huan, CreditEase’s chiefstrategy officer, explained that for CreditEasethe difficulty of verifying credit informationmeans that only a very small percentage of

lenders are qualified for online borrowing.CreditEase therefore relies primarily on itsoffline branches to verify borrowers. Thecredit verification process is more like that ofa traditional bank, in which offline creditofficers approve lending. CreditEase offersboth collateralised and non-collateralisedloans. With property as collateral, lendingamounts can range from RMB300,000 toRMB4m. Non-collateralised loans can rangefrom RMB50,000 to RMB100,000.12 The loanterm is up to two years.

While all loan contracts are betweenindividual lenders and borrowers, CreditEaseacts like a broker. The company charges allborrowers a flat rate of 12% interest on thevalue of the loan, regardless of the risk level.In addition to the flat fee of 12%, thecompany also charges borrowers anadditional interest rate fee depending on thetype of loan product (there are six differentloan products) and its assumed risk level.Borrowers pay the flat 12% interest plus theloan product fee, which brings the totalinterest fee to the borrower to between 12%and 24% interest on the principal. All lendersreceive a list of recommended borrowers tochoose from; if they do not like the borrowers

on the list, they may ask for a new list.

Lenders are offered a flat 12% interest ratereturn on their principal regardless of the risklevel of the loan. The additional interestcharge to the borrower (for the loan product)is deposited by the company in a ‘bad loanreserve’, which is used to satisfy loanguarantees on the principle in cases whereborrowers end up defaulting. The averageinvestor amount is about RMB500,000 andthe average loan size is around RMB50,000.


4. A typology of peer-to-peer lending models in China

200%growth over the past five years,and by mid-2014 Paipaidai’stotal transaction volume wasover RMB1.4bn

11 The official name of the Chinese currency is the renminbi (RMB) and its unit of account is the yuan.

12 The average CNY (RMB) to USD exchange rate was 6.2 RMB to 1 USD in the year to 18 September 2015. Author’s calculation based on data from, .


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4. A typology of peer-to-peer lending models in China

Online and offlineDianrong, Jimubox and RenRenDai areexamples of peer-to-peer lending providersthat combine new online financial technology

with offline processes.

Dianrong.com (点融网) is a technology-basedpeer-to-peer lending company that startedoperations in March 2013. Dianrong wasco-founded by Soul Htite, who had alsoco-founded Lending Club in the US and whohad been a leader in using technology toautomate much of the credit-lending cycle.Dianrong started by building a technology-based direct lending platform for SMEs andthen moved into personal lending. Slightlymore than half of Dianrong’s lending businessis conducted with SMEs.

In an interview, Pan Jing, Diangrong’s chiefmedia officer, explained that although theinitial idea was for Dianrong to replicate thetechnical and operational model of LendingClub, the founders realised this approach wasnot viable because of large differences in theavailability of credit information and verydifferent investor characteristics in China fromthose in the US. In response to investor-risk,Dianrong has developed a group-investingproduct through which investors grouptogether to pick a loan strategy in whichdirect contracting and diversification is fullyautomated through a real-time transactional

system. As new investors join and new loansbecome available, the group-investing productautomatically divests among more borrowers.

This group-investing product differs from thepractice of pooling funds and investingthrough trusts or index funds, which can beless transparent. In Dianrong’s group-investing system, the contracting remainsdirect contracting and all details are availableto investors through a real-time transactionalsystem. Dianrong offers a guarantee toinvestors on their principal, but this isconditional on their investing through aheavily diversified group investment system.

Dianrong emphasises the need for offlineprocesses because of the relative lack ofreliable credit information on borrowers inChina. Dianrong seeks to establish a directoffline relationship with borrowers. Thecompany has 11 offices spread across China

and many of its borrowers come from referralsfrom its own offline offices and teams.Dianrong uses site visits to verify borrowers’information. Personal loans made via

Dianrong average from RMB50,000 toRMB150,000. SME loans are RMB1m–2m inaverage size. The interest rates vary from 8%at the lowest to 20% at the highest. The loanterms are from 1 month to three years.Dianrong is also involved in establishing anumber of partnerships with local banks, suchas Suzhou Bank, to start peer-to-peer lendingplatforms. Under these partnerships Dianrongprovides the technology services and theplatform is operated by the bank.

Jimubox.com (积木盒子) is a direct peer-to-peer lending platform with its headquarters inBeijing. In an interview, Jimubox co-founder,Barry Freeman explained how it had startedlending in August 2013 and by the end ofNovember 2014, it had about half a millionusers, over RMB3bn in total lending andabout RMB 540m in current lending. In July2015, Jimubox’s primary trading volume hadclimbed to RMB900m, with anotherRMB200m in secondary trading of primaryloans. Because Jimubox was later to startonline peer-to-peer lending in China, thefounders sought to establish the companywith a business model aligned with theexpected incoming sector regulations.Jimubox does not use credit pooling (rather,

all lending is direct one-to-one lending) orany form of loan guarantees for investors (oneither principle or interest), which means thatthe business is in line with recent andexpected regulatory changes.

Small and medium enterprise (SME) lendingis the largest Jimubox loan category.Jimubox’s SME loans are mostly for largerenterprises, with loan sizes ranging in valuefrom RMB1m up to RMB15m. For a loan bidto be registered on Jimubox, SME borrowersmust have an approved third-party credit-guarantee company backing their bid. Loansmust have some form of ‘credit enhancement’

and ‘security’. While loans are always made toindividual SMEs, the bid registration processmay come from the SMEs themselves or fromthird-party credit-guarantee companies(‘channel partners’) seeking to raise funds forindividual SMEs via Jimubox.

In response to investor-risk, Dianrong has

developed a group-investing productthrough which investorsgroup together to pick aloan strategy in whichdirect contracting anddiversification is fullyautomated through a real-time transactional system.


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4. SMPs are vulnerable, but shrewd commercial practices can protect them

Jimubox started with a 100% SME loansbusiness but that mix is now changingdynamically towards other categories:consumer lending, luxury car lending, and

mortgage-based lending (bridging finance).Consumer loans tend to be from RMB50,000to RMB100,000, while bridging finance loansfor property sales range from RMB500,000to as high as RMB6m.

Jimubox also relies on offline operations,such as monthly investor meetings and sitevisits by local credit-risk-assessment fieldteams. To register a bid for a loan, allborrowers must undergo Jimubox’s duediligence based on primary verification data.Many of Jimubox’s loan bids are contractedonline by investors via bids made on theirsmart-phones through a Jimubox app.

Local credit-risk-assessment field teams alsouse a mobile application which allows themto upload details from site visits (photos,financial data, records, etc.) for centralprocessing by the credit-risk team in Beijing.Detailed loan data for all historical loans andfor all current bids are also available online,and are processed via the internal credit-risksystem. Jimubox sees this high level ofinformation transparency as a differentiator.Jimubox also has one of the most developedsecondary liquidity markets for its loans.Liquidity risk (arising from liquidity mismatch)

is a problem for direct lending – investorsoften want to make short-term loans of a fewmonths, whereas borrowers often want longerterms of up to a year. To get around thismismatching, there is an active secondarymarket for Jimubox loans. Each month,investors trade as much as 25%–27% of itsloans by value in a secondary market.

Renrendai.com (人人贷) is a direct lendingcompany with an online direct lendingbusiness, but which mostly operates offlinepeer-to-peer lending. In an interview, TangNan, RenRenDai’s government affairs director,explained that the loan amounts range fromRMB3000 to RMB200,000 and loan terms arefrom 3 to 36 months. RenRenDai had 1m totalusers and an active membership of about250,000 members at the end of 2014.Although RenRenDai has a mostly offlinelending model, it also has an online lendingbusiness with lower loan sizes.

For a borrower who is registered onlinewithout a third-party referral from a loancompany, the minimum loan amount isRMB3000 and the maximum is aroundRMB8,000–10,000. Borrowers are asked fortheir basic information, which is cross-verifiedand checked against RenRenDai’s credit-rating model. RenRenDai also relies on offlinereferrals from loan guarantee companies. Themain offline lending business funds borrowerswho are registered via an offline referral fromthird-party lending companies. The minimumborrowing amount for registered offlineborrowers is about RMB50,000. RenRenDaihas a bad-loan reserve fund that is managedby a third-party bank and is used for coveringlosses on investor principles.

Many of Jimubox’s loanbids are contracted

online by investorsvia bids made on theirsmart-phones through a Jimubox app.


15/24

For this report, borrowers and lenders usingthe peer-to-peer lending platform Paipaidaiwere surveyed in early 2015 with the aim ofgaining a more detailed understanding of

their financing needs, motivations andchoices. There were 935 valid responses fromPaipaidai members, out of a potential poolof 180,000 members who had open contractsat the time of the survey.

SURVEY METHODS

The research team designed a detailedqualitative survey questionnaire, which washosted on a secure online server and was livefor six weeks from 25 January to 15 March2015. An online survey link from Paipaidai’ssocial media messaging system was sent toall Paipaidai members with current open

contracts on the platform. Respondentsself-selected to participate in the survey.Respondents had to enter a valid Paipaidaimembership name and number. Allrespondents were given the first part of thesurvey that asked basic demographicquestions. Respondents were also asked toself-select for part two of the survey, whichwas about their main use of the platform, i.e.whether they were individual borrowers,lenders, business borrowers or dualborrowers and lenders on the platform. Thesurvey data were then anonymised beforebeing analysed by the research team.

SURVEY RESPONSES

Out of 935 valid online survey responses fromPaipaidai members, 342 respondentsidentified as individual borrowers and 515 asindividual lenders. A further 35 respondentsidentified as business borrowers and another43 respondents said they were bothborrowers and lenders. Selection bias isinherent in self-selection based surveys andsome types of respondents may beoverrepresented while others may beunderrepresented compared with the generalpopulation. In this case, the individualborrowers responded at a much higher ratethan business borrowers.

According to Paipaidai, about 40% of thecompany’s borrowers are small and microbusinesses yet most borrower respondents tothe survey said that they were individualborrowers rather than business borrowers.This is discussed in the individual andbusiness borrower sections below.Nevertheless, the socio-demographic

characteristics of the survey respondents arealmost identical to data on the generalpopulation of Paipaidai platform members,which was provided to the research team by

Paipaidai. The survey responses are below.

INDIVIDUAL BORROWER RESPONSES(n = 342)

Male, young and tertiary educatedThe demographic profile of individualborrower respondents on the Paipaidaiplatform was overwhelming male (88%) andyoung, with 64% of individual borrowerrespondents reporting that they were 31 yearsof age or less. Most individual borrowerrespondents were tertiary educated (56%)comprising 33% with college qualificationsand 23% with university qualifications.

Low and ‘mass middle class’ income rangesThe majority of individual borrowers (52%)reported a low-income range of RMB2000to RMB5000 a month. This monthly incomerange is less than a taxi driver earns in atier-one city such as Beijing or Shanghai,and reflects the young age of individualborrowers and possibly some under-reportingof income. The next largest share ofindividual borrowers (36%) reported amonthly income of between RMB5000 toRMB10,000 a month – a monthly incomerange which a McKinsey report gives as a‘mass middle-class’ income range for China(Barton et al. 2013). A minority of individualborrowers (10%) reported an ‘upper middle’income range of between RMB10,000 andRMB20,000 a month.

The residential housing situation ofrespondents also provides a view of theirrelatively young age, low income and limitedwealth: 30% of individual borrowers wereliving with their parents, 27% were in rentalaccommodation, 28% were in owner-occupied housing with a mortgage, and 9%owned their own home outright.

The majority of individual borrowerrespondents (63%) worked in privatebusinesses. The survey data does not revealhow many of these respondents wereemployees or business owners, but it is clearfrom the reported use of funds (below) thatsome individual borrowers were borrowingfor their own business purposes. A further14% of individual borrowers worked instate-owned enterprises and 12% worked inpublic institutions or government agencies.

For this report, borrowersand lenders using the

peer-to-peer lendingplatform Paipaidaiwere surveyed in early2015 with the aim ofgaining a more detailedunderstanding oftheir financing needs,motivations and choices.

5. Survey findings from Paipaidaiborrowers and lenders

15


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5. Survey findings from Paipaidai borrowers and lenders

Borrowing ‘to accumulate credit worthiness’The most surprising response to the surveyfrom individual borrowers concerned themain ‘loan use’ they identified for borrowing

funds online. The main loan use reported by51% of individual borrowers was ‘toaccumulate credit worthiness’ (Figure 5.1).These borrowers were taking on interestrepayments in the range of 8% to 18%interest to secure a positive online creditrating. The share of respondents borrowing‘to accumulate credit worthiness’ was highacross all individual borrower respondents’income and loan interest ranges, regardlessof whether they had previously borrowedfrom other financial institutions. This suggeststhat, in the absence of widely accessibleformal credit sources in China, individualborrowers are prepared to pay very hightransaction costs to secure better financingterms in the future.

Over half (56%) of individual borrowerrespondents also reported that they had noprevious borrowing history from otherfinancial institutions such as traditional banks,credit societies or other entities (Figure 5.2).The next most common loan uses were ‘tomeet basic needs’ (20%), and ‘to fund majorpurchases’ of consumer durables (9%), whichare typical consumer-financing reasons. Afurther 7% of individual borrowers reportedthat they were borrowing funds to finance

their own businesses, for use as workingcapital or to meet start-up costs.

Borrowing at between 8% and 18%interestThe interest rate borrowing range for mostindividual borrowers (73%) was between 8%

to 18% a year (Figure 5.3). The largestproportion of individual borrowers (38%)reported borrowing at between 8% and 12%while the next largest group (35%) reportedborrowing at interest rates between 12% and18%. Most individual borrowers reported thattheir borrowing amounts were low. Thelargest proportion of individual borrowers(49%) reported borrowing between RMB3000and RMB5000 (Figure 5.4): about a month’sincome at the low-income range. The nextlargest share of individual borrowers (20%)reported that they generally borrowedamounts of between RMB5000 andRMB10,000.

Most individual borrowers (91%) reportedthat they borrowed on short terms of oneyear or less, while the largest group ofindividual borrowers (40%) said theyborrowed for between three to six months.The low borrowing threshold and easy-application auditing were cited by 72% ofindividual borrowers as their main reason forchoosing internet finance loans on a platformsuch as Paipaidai.

51%The main loan use reported by51% of individual borrowers was‘to accumulate credit worthiness’.

Figure 5.1: Main loan use (n=341) Figure 5.2: Borrowed from banking, insurance, credit or otherfinancial institutions or entities (n=339)

0% 10% 20% 30% 40% 50% 60%

Other, please specify

Working capital, business

Accumulate creditworthiness

Buy furniture, appliances

Children’s education

House decoration

To get married

Basic needs

5%

7%

51%

9%

1%

6%

1%

20%

60%

50%

40%

30%

20%

10%

0%No Yes

56%

44%

Figure 5.3: Interest rate borrowing range (n=342)

40%

35%

30%

25%

20%

15%

10%

5%

0%

11%

8% or less 8-12% 12-18% 18-20% 20-25% More than 25%

1%

5%

10%

35%38%

Figure 5.4: Loan value range, RMB (n=342)

0% 10% 20% 30% 40% 50% 60%

100001 or more

50001-100000

30001-50000

10001-30000

5001-10000

3000-5000

Less than 3000

2%

2%

6%

10%

20%

49%

11%


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INDIVIDUAL LENDER RESPONSES(n=510)

Individual lender respondents (a total of 510

of the respondents) tended to be slightlyolder and more highly educated than theborrowers; 80% of them said they were male,and 20% female, so women are a higherproportion of lenders than of borrowers.Lenders also tended to be young, with 73%between the ages of 20 and 38 years, butthere were also more lenders (27%) who were39 years or older. Lenders tended to be morehighly educated than borrowers were: 86% oflenders had tertiary qualifications, 56% havingcompleted university-level degrees. Of these46% had bachelor’s degrees and 12% hadmaster’s degrees.

Lenders reported higher earnings thanborrowers didWhile the largest proportion of lenders (46%)reported monthly incomes at the lowRMB3,000 to RMB5,000 range, 39% reportedincomes of between RMB5,000 andRMB10,000 a month while 14% reported highincomes of between RMB10,000 andRMB20,000 a month. The largest group oflenders worked in private business (45%). Ahigher proportion of lenders than borrowersworked in public institutions and government

agencies (25%). The largest proportion oflenders (41%) lived in their own home withouta mortgage, while another 24% lived inowner-occupied housing with a mortgage.

Lender views and motivationsLenders were asked their main reasons(multiple responses allowed) for choosing aninvestment channel such as Paipaidai loans(Figure 5.5). The most common responseswere to increase the number of availableinvestment channels (76%), to realise capitalgains (73%), and to get higher returns thanthe bank interest rate (73%). For 11% oflenders, supporting wider social developmentand SME financing was a reason for investingthrough a peer-to-peer lending channel suchas Paipaidai. When asked what they thoughtwas the largest constraint on thedevelopment of internet finance, mostlenders (59%) chose ‘the credit environment’,followed by the level of economicdevelopment (37%). Most borrowers, incontrast, selected these constraints equally(46%), which suggests that lenders tended tobe more conscious of credit risk thanborrowers were!

Lender bid preferencesMost lenders (57%) said they usually bid forloans with interest rates in the 12% to 18%

range (Figure 5.6), that is, at an interest raterange that was three to five times higher thanthe bank deposit rate at the time of thesurvey. The largest share of lender

respondents (49%) said they generally bid forloans in a three-to-six-month term range(Figure 5.7). The most common amount thatlenders bid for (47%) was in the low RMB3000to RMB5000 range, with 20% of lenderschoosing to bid for loans of less thanRMB3000. Lenders were also asked to choosefrom a list of the main factors that theyconsidered in making their bids on thePaipaidai platform (multiple responses wereallowed, see Figure 5.8). The most commonresponses were the borrower’s credit rating(72%), Paipaidai’s loan security guarantee(72%), the interest-rate level of the loan (52%),and the borrower’s certification status (51%).

Individual rather than institutionalinvestorsMost investor respondents said that theywere carrying out investments on their ownbehalf (85%). A further 3% said they were alsoinvesting for family and friends, while only 1%of lenders said they were investing for otherson an institutional basis. In addition, 10% ofindividual lender respondents identifiedthemselves as observers rather than activeinvestors on the Paipaidai platform.

Figure 5.5: Main reasons for selecting an investment channel likePaiPaiDai to bid for lending (n=507) multiple response

0% 10% 20% 30% 40% 50% 60% 70% 80%


To support widersocial development

To support SME financing

To get a higher returnthan the bank’s earnings

To realize capital gains

Increase investment channels,

optimise asset allocation

1%

10%

10%

65%

72%

76%

Figure 5.6: Preferred interest rate lending bid range (n=509)

70%

60%

50%

40%

30%

20%

10%

0% 2%

8% or less 8-12% 12-18% 18-20% 20-25% More than 25%

1%

6%

12%

57%

22%

Figure 5.7: What loan term do you generally bid for on PaiPaiDai?(n=510)

60%

50%

40%

30%

20%

10%

0%

11%

3 months 3-6 months 6-9 months 9-12 months 12-18 months 18 monthsor less or more

1%1%

17%21%

49%

0% 20% 40% 60% 80%


The borrower’s use of funds

Bid progress

Borrower’s certification status

Interest rate level

PaiPaiDai’s loan security

guarantee

Borrower’s credit rating

4%

24%

21%

51%

52%

72%

72%

Figure 5.8: What factors do you most value in making your bids?( n=515) (multiple answers)


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BUSINESS BORROWER RESPONSES(n=24)

Only 24 of the respondents completed the

business borrower section of the survey. Acrossall borrower respondent categories, 90 out of atotal of 935 survey respondents said that theywere borrowing to finance their businesses, iefewer than 10% of respondents.13 Nevertheless,this gives some data on self-identified businessborrowers. These business borrowers tendedto be older than the individual borrowers.Business borrower respondents were alsooverwhelming male (91%) and tertiary educated(74%). Of these, 52% had completed collegeand 22% had university-level qualifications.Business borrower respondents reportedhigher monthly incomes than the individualborrowers: 43% of business borrowers

reported a monthly income of RMB5000 toRMB10,000 and 35% reported a monthlyincome of RMB10,000 to RMB20,000, whichwas the highest response at this income range.

Small and micro business borrowersThe registered or operating capital of businessborrowers’ enterprises was very modest: thelargest proportion (39%) reported betweenRMB100,000 to RMB500,000, and the nextlargest proportion (22%) reported betweenRMB1m and RMB5m. Most business borrowersreported very low business revenues for their

most recent complete financial year. Thelargest proportion (45%) of businessrespondents reported very low businessearnings of RMB20,000 or less a year. This

suggests that such businesses are side-businesses and that the owners have othersources of income, or that their business isdoing very poorly, or that they aremisreporting. The next largest group ofbusiness borrowers (23%) reported businessrevenue of RMB20,000 to RMB50,000. A further18% reported business earnings of RMB 50,000to RMB 100,000, and 14% reported earnings inthe range of RMB 100,000 to RMB 500,000.The majority (52%) reported they had 6– 20employees, 22% had 21–50 employees, andanother 22% had five employees or fewer.

Financing short-term cash flowThe most common reason chosen bybusiness borrowers for taking out peer-to-peer loans (65%) was to meet daily short-termcash flow needs (Figure 5.9). Most hadshort-term loan needs of less than 12 months(87%) with the largest share (39%) seekingloans for three to six months. The mostcommon interest rate range was between 8%and 12%. While the largest group of businessborrowers (36%) were borrowing at theRMB3000 to RMB 5000 range, the loan valuerange was also evenly spread and includedloans at higher values.

Low borrowing thresholdThe most common reason chosen bybusiness borrowers for choosing internetfinance loans was the low threshold and easy

borrower audit process (87%). Businessborrowers were also asked what factors theythought could lower their Paipaidai loaninterest rate. Their most common multipleresponse choices (Figure 5.10) were goodloan payment transactions on the Paipaidaiplatform (87%), more detailed businessoperating information, such as their Taobaotransaction history (70%), and detailedpersonal or business credit reports from thePeople’s Bank of China Reports (57%).14

Most business borrowers were newborrowersMost business borrowers (73%) said they hadno previous experience of borrowing fromother financial institutions (Figure 5.11), butmost had some form of trade credit line(Figure 5.12). Trade credit lines with tradingpartners were the most common form of creditline (48%), followed by non-bank credit lines(39%) such as with AliFinance, the micro-creditarm of Alibaba, and bank credit lines (22%).Most business borrowers had a formal writtenbusiness plan (70%), most had financiallytrained or qualified person in charge ofbusiness finances (61%), and reported that theproduced regular management accounts (57%).

13 In addition to the 24 self-identified business borrowers, there were 24 individual borrower respondents who were borrowing to finance business needs, including working capitalor daily cash flow needs, and to start their own business ventures. A further 43 respondents who selected themselves as dual borrowers and lenders were also business owners.

14 The People’s Bank of China (POBC) is China’s central bank, and also maintains China’s national credit-registry data centre.

Figure 5.9: Main loan purpose (n=23) Figure 5.10: What factors do you think can lower your PaiPaiDai loaninterest rate? (n=23) multiple response

0% 10% 20% 30% 40% 50% 60% 70%

Other

Accumulate credit ranking

Entrepreneurship

Expand production scale

Holiday or season stocking

Daily short-term cash flow

4%

9%

4%

4%

13%

65%

Figure 5.11: Have you borrowed from other financial institutions orentities? (n=23)

Figure 5.12: What other type of finance does your firm use (n=23)multiple response

0% 20% 40% 60% 80% 100%

Site visits to borrowersfrom loan officers

Good loan payment transactionson the PaiPaiDai platform

Details central bank personalor business credit report,

eg showing that the enterprisehas a good debt ratio

More detailed businessoperating information

eg Taobao transaction history

4%

87%

57%

70%

90%

80%

70%

60%

50%

40%

30%

20%

10%

0%No Yes

78%

22%

0% 10% 20% 30% 40% 50% 60%

Other

Property or equipmentfinancing leases

Bank loan or loan fromother financial institution

Other non-bank credit line(eg Alifinance)

Bank credit line

Trade credit line withtrading partners

Insurance

9%

4%

26%

39%

22%

48%

9%


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DUAL BORROWER AND LENDERRESPONSES (n=43)

The survey had 43 respondents who said they

were both borrowers and lenders on thePaipaidai platform. The socio-demographicprofile of dual borrowers and lenders wassimilar to other Paipaidai members: 78% weremale, 69% were between 26 and 38 years oldand 69% were tertiary educated, of which36% were university graduates and theremaining 33% were college graduates. Dualborrowers’ and lenders’ income andresidential housing asset profiles were closerto the profiles of those who were simplylenders than the profiles of those who weresimply borrowers. More than half the dualborrowers and lenders (55%) reported amonthly income of between RMB5000 and

RMB10,000, while 21% reported a monthlyincome of between RMB10,000 andRMB20,000.

The proportion of dual borrower and lenderrespondents who said they worked in privatebusinesses was 77%, compared with 63% forindividual borrower respondents, while 14%said they worked in a public institution or in agovernment agency. The majority wereproperty owners: 39% lived in their own homewithout a mortgage, while another 27% livedin their own home with a mortgage. Nearlyhalf (49%) also said the most common waythat they travelled was by car, which is higher

than for the general population.

Dual borrower and lenders tended to bebusiness ownersMost dual borrowers and lenders had theirown business enterprises: 27% reported that

their business had been operating forbetween 5 and 10 years. Most reported a verylow business sales revenue, with the largestshare of respondents (44%) reporting businessrevenue of RMB20,000 or less. Their registeredcapital or online shop operating capitaltended to be higher than that of individualbusiness borrowers. The largest proportion(30%) reported registered or operating capitalof between RMB100,000 and RMB500,000.Most were employers: 36% had between fiveand nine workers, while 33% had four or fewer.There were also some larger medium-sizedenterprises: 11% (four respondents) said theyhad between 300 and 999 workers.

Borrowing ‘to accumulate creditworthiness’ and for cash flowThe most common reasons selected (multipleresponses, see Figure 5.13) for borrowing bydual borrowers and lenders was to accumulatecredit worthiness (77%), followed by meetingdaily short-term cash flows needs (67%). Thelargest proportion (40%) of dual borrower andlender respondents borrowed at interest ratesof between 8% and 12%, with the next largestgroup (35%) borrowing at the 12% to 18%range. The borrowing amounts or loan valueswere mostly low, with the largest proportionborrowing in the RMB3000 to RMB5000 range,and the next largest group (23%) borrowing inthe RMB5000 to RMB10,000 range. Their

loan-term needs were short, with the largestproportion (47%) borrowing at three-to-six-month terms (Figure 5.14).

Low loan threshold given as main reasonfor borrowing onlineThe main reasons selected by dual borrowersand lenders for choosing internet financeloans were the low loan threshold and easyborrower auditing (73%) followed by thechoice of interest rates (63%). Most (60%)thought that the main way they could lowertheir interest rate for borrowing was byaccumulating a record of good loantransactions. The most common reasonschosen for being unable to obtain timelyaccess to bank loans (multiple responsesallowed) included strict loan qualifications(55%) and a shallow relationship with the

banks (40%) (Figure 5.15).

Most respondents (56%) said that they hadnot borrowed from other financial institutionsbefore, although as with other businessborrowers most also had some form of tradecredit line (Figure 5.16) either with tradingpartners (42%), with banks (34%) or with othernon-banks such as AliFinance (32%). Mostdual borrower and lender respondents (76%)reported having a formal written businessplan for their business, while 45% said theirbusiness produced regular writtenmanagement accounts and had a financiallytrained or qualified person in charge of

business finances. Three respondents (8%)said they had a formal finance team.

Figure 5.13: Main loan purpose (n = 39) multiple response

0% 10% 20% 30% 40% 50% 60% 70% 80% 90%

Accumulate credit ranking

Daily short-term cash flow

Expand production scale

Holiday or season stocking

Entrepreneurship

77%

67%

31%

26%

23%

Figure 5.14: Loan term needs (n = 42)

50%

40%

30%

20%

10%

0%

8%

3 months 3-6 months 6-9 months 9-12 months 12-18 months 18 monthsor less or more

3%8%

13%

21%

47%

Figure 5.15: Reasons for being unable to obtain timely access tobank loans (n = 40) multiple response

0% 10% 20% 30% 40% 50% 60%


Friendship with bank shallows

The bank’s efficiency

Government policy reasons

Some enterprise indicatorsdo not meet requirements

Strict loan qualification

13%

40%

35%

25%

35%

55%

Figure 5.16: Types of finance used by respondents business (n = 38)multiple response

0% 10% 20% 30% 40% 50% 60%

Bank loan or loan fromother financial institution

Trade credit line withtrading partners

Bank credit line

Other non-bank credit line(eg Alifinance)

Insurance

Property or equipmentfinancing leases

5%

45%

32%

34%

42%

21%


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Understanding the development of peer-to-peer lending in China can help SMEcommunities and organisations understandand explore peer-to-peer lending and other

forms of alternative finance as viable optionsfor their financing needs. Peer-to-peerlending is an innovative and rapidly growingalternative financing channel in China; itentails innovations in the production andapplication of the intermediate financialinputs of information and risk.

Peer-to-peer lending reduces the costs ofobtaining and evaluating borrower creditinformation and decentralises financialdecision making, handing that power toindividuals. The potential effect of theseinnovations is to lower the traditionally heldbarriers to financial access for the mass ofpersonal and business borrowers in China, asit does in many developing countries acrossthe world (World Bank 2013).

Peer-to-peer lending in China has alreadypotentially lowered the credit accessthreshold for millions of consumers and smalland micro enterprise borrowers. Over half theborrowers who responded to the survey saidthey had no prior borrowing history fromeither traditional financial or other creditinstitutions. While many peer-to-peerborrowers are personal borrowers, thisresearch suggests that business borrowers –

mostly owners of small and micro businesses– could account for 20% to 40% of peer-to-peer borrowers in China.

At the same time, China’s unique creditenvironment has led to a distinctive set ofpeer-to-peer lending provider models inChina. Because of the limits of reliable creditinformation, peer-to-peer lending providersin China also tend to rely much more onoffline processes than their counterparts inmore developed countries.

Much of the discussion of peer-to-peerlending in China has centred on the potentialrisks posed by the sector. In the absence ofaccessible institutional channels for gaining

access to credit, the ACCA’s survey findingsshow that unsecured borrowers’ may seek to‘accumulate creditworthiness’ throughborrowing and meeting loan repayments.This suggests that online platforms createtransparency, which is a mitigating factoragainst the risk of fraud and credit default.The development of a regulatoryinfrastructure, which can verify or provideproxies for credit information, is also crucial toextending access to finance (ACCA 2014b: 4).

After some years of allowing the rapid growthof internet finance, China’s governmentintroduced its first detailed ‘guidance’regulations on internet finance, includingpeer-to-peer lending, in July 2015. The mostsignificant regulatory change is therequirement that peer-to-peer lendingproviders hold all borrower funds in custodianaccounts with ‘registered financialinstitutions’. This raises the regulatory hurdlesfor peer-to-peer lending providers and it willlead to some further consolidation of thesector. It will also place peer-to-peer lendingproviders that meet the new regulatorystandards on a much firmer footing in future.

As China’s peer-to-peer lending sector and

other new forms of alternative finance, such asequity-based crowdfunding, develop, moredetailed efforts by policymakers, regulatorsand interested parties, including ACCA, willbe needed to ensure that there is detailedreliable data on the development andoutcomes of alternative financing for SMEcommunities. To this end, international effortto conduct detailed primary research on thescale, composition and the financial outcomesof peer-to-peer lending and other alternativefinancing activities would also help identifyand promote examples of legal and regulatory‘best practice’ in regulating new alternativefinancial services for individuals and SME

communities in different jurisdictions.

Understanding thedevelopment of peer-to-

peer lending in China canhelp SME communitiesand organisationsunderstand and explorepeer-to-peer lending andother forms of alternativefinance as viable optionsfor their financing needs.

7. Conclusion 21


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Appendix 1: SME classifications in China 22

Table A1.1: SME classification standards in China (2011)

No. of employees

Operating revenue

(in million RMB)

Farming, Forestry, Animal Husbandry & Fishery Medium 5-20

Small 0.5-5

Micro


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References 23

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ACCA (Association of Chartered Certified Accountants) (2014b),Innovations in Access to Finance for SMEs, ,accessed 25 February 2015.

Barton, D., Chen Y., and Jin A. (2013), ‘Mapping China’s Middle Class’,McKinsey Quarterly (June) , accessed 1 August 2015.

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The Rise of P2P Lending in China

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