Barberis and Arner on FinTech in China: From Shadow Banking to P2P Lending (new book chapter)

"FinTech in China: From Shadow Banking to P2P Lending"
Janos Barberis (PhD candidate) and Douglas Arner
in P Tasca, T Aste, L Pelizzon & N Perony (eds), Banking Beyond Banks and Money (Springer 2016) 69-96

Abstract: In 1978 China Financial sector has began a gradual reform process. Within 40 years the country went from a mono-bank model to one composed of hundreds of wholly-owned State banks and joint stock commercial banks. Yet this diversification has the banking landscape has not resolves credit allocation inefficiency. Indeed, whilst SME represent 80 % of the economic output of the country, it is only receiving 20 % of the credit originated by banks. This has spurred the development of shadow banking, an informal and unregulated network of lenders and borrowers. The emergence of Financial Technology has allowed for this activity digitized itself in the form of Peer-to-peer lending channel. The combination of and unregulated market and large credit gap has lead to the emergence of a sector that had only one platform in 2007 and over 2000 in 2015. Therefore the author submit that the emergence of the P2P sector in China is neither new, nor unexpected. Ultimately, this systemic shift caused by the P2P sector offers China a regulatory and market reform opportunity as the shadow has been brought to the light.

Emily Lee on China's Shadow Banking System after the Global Financial Crisis (PekingULJ)

"Shadow Banking System in China after the Global Financial Crisis"
Emily Lee
Peking University Law Journal
March 2016, Vol. 3, Issue 2, pp 362-384

Abstract: This article first examines the composition of the shadow banking system in China and then critically analyses its interconnectivity with the traditional banking system and global capital markets. It argues that whilst shadow bank lending in China contributes to the country's economic growth, the normal functionality of capital markets could be impaired if shadow banks continue to operate on a high-risk/high-yield business model which could potentially pose a systemic risk. It also addresses the concerns arising from high-leverage shadow bank lending practice and cautions against shadow banks operating in a black hole area that enables them to escape from regulatory purview. The article suggests that future regulatory (law) reform should guide shadow banks towards consumer protection by establishing an effective internal control system, enabling sufficient risk controls and requiring material information disclosure; towards safeguarding capital markets; and towards reducing their high levels of leverage. Contact the author for a copy.

New Scholarship on Shadow Banking

"The Shadow Banking System - Why it Will Hamper the Effectiveness of Basel III"
Emily Lee
Journal of International Banking Law and Regulation
Vol. 12, July 2015 (forthcoming)

Abstract: This article examines why regulatory arbitrage and the interconnectivity between the traditional banking and shadow banking systems amplified the pro-cyclicality during the global financial crisis of 2007-2009; and discusses why the regulatory focus should turn to reducing the interconnectedness of the two systems in order to prevent systemic risk to the global financial system. This article also predicts that Basel III’s heightened capital requirements will have a limited impact on curbing shadow banking activities and may inadvertently push traditional banks to rely even more on shadow banking in order to sustain their financial position or to generate greater revenue.  Click here to download the article.

"Shadow Banking Cases Threaten to Overwhelm China's Courts"

Susan Finder (Fellow, Centre for Chinese Law)

The Diplomat

5 June 2015

Many bankers and economists have been looking at shadow banking in China. But what happens when debtors fail to pay their debts or challenge the lending arrangements? When parties to shadow lending end up in dispute resolution, it raises unique issues for the institutions that hear those cases.

     What few outside of China have noticed is that shadow lending disputes account for an increasingly large proportion of civil cases in the Chinese courts and involve increasingly large amounts of money. The law on shadow lending is particularly unclear and fluid, causing uncertainty for debtors, lenders, and judges.

     Government recognition of internet lending and peer-to-peer (P2P) lending, now at an early stage, likely means that many more shadow lending disputes are destined for the already stressed court system...  Click here to read the full article.