Evaluating the regulatory scheme for internet finance in China: the case of peer-to-peer lending

This article assesses the potential risks associated with Internet finance in China, and discusses the implications for the regulatory framework, through a case study of peer-to-peer lending platforms. The analysis uses publicly available platform-level data up to December 2015 to identify the risk factors associated with different platforms. The analysis employs the Kaplan-Meier method to estimate survival probability, and uses duration analysis to identify how each risk factor contributes to the survival probability and life expectancy of each platform. The findings show that platforms with recent establishment dates, missing key information, a narrow range of interest rates, extreme interest rates, undiversified projects, and guarantees for principal and interest tend to have lower survival probability and shorter life expectancy. Based on these findings, the article assesses the appropriateness of the regulatory framework the authorities have recently proposed: whether the platforms should be treated as an information intermediary instead of a credit intermediary, whether the main regulation responsibilities should be assigned to local governments or industry associations, and whether new entrants should be required to have a minimum of registered capital. The article also makes some recommendations on information disclosure and risk management requirements for the peer-to-peer lending industry.