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China’s Online Financial Sector Comes of Age

Online peer-to-peer lending may hold the key to expanding and deepening China’s financial sector, enabling firms to grow, and bolstering domestic consumption. But the very factors fueling P2P platforms' rapid growth – their reliance on credit-ratings databases and eschewal of collateral or guarantees – can generate serious risks.

BEIJING – Last month, China’s leaders revealed details of the 13th Five-Year Plan, which will guide the economy’s trajectory until 2020. Gone are the directives to expand industrial production at a breakneck pace that characterized previous five-year plans. Now, the focus is on achieving sustainable long-term growth, underpinned by domestic consumption, a stronger services sector, entrepreneurship, and innovation.

The Internet – which already has more than 680 million active users in China – will play a key role in facilitating this shift. In particular, online peer-to-peer (P2P) lending, a streamlined approach to credit allocation, may hold the key to expanding and deepening China’s financial sector, enabling firms to grow and innovate, and bolstering domestic consumption.

In online P2P lending, individual (and, lately, institutional) investors provide funds that can be lent out to individual borrowers, without involving a traditional financial intermediary. Loans can range from CN¥100 ($16) to CN¥1 million, and target small and medium-size enterprises (SMEs), as well as individual borrowers, that currently struggle to access credit through traditional institutions.

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