The Chinese government is undertaking a major push to roll P2P online lending into the social credit system.
The new measures, “Notice on Strengthening the Construction of Credit Reporting System in the Field of P2P Internet Credit” (关于加强P2P网贷领域征信体系建设的通知), are aimed at cracking down on debt evasion (by both lenders and borrowers) in the online space by improving the information exchange between lending platforms and national credit reporting agencies.
These measures are also interesting in that they further clarify the role that Baihang Credit will play in China’s internet finance space.
Baihang was established in 2018 with the specific purpose of conducting credit reporting for non-traditional – specifically fintech – loans, and is currently the only credit reporting agency licensed to provide financial credit reports on individuals (rather than enterprises). Its shareholders include Alibaba, Tencent, and six other online lending giants. (Learn more about Baihang Credit in our free report, Understanding China’s Social Credit System).
Following the social credit system’s “unified rewards and punishments” approach, the policy outlines how the central government would like to see local governments and financial institutions cooperate to penalize both untrustworthy lenders and borrowers, encouraging:
- Banks and financial institutions to raise their loan and property insurance interest rates
- Banks and financial institutions to restrict their access to loans and insurance
- Local government departments to cooperate in establishing and standardizing further joint punishment mechanisms
- Baihang Credit and other credit reporting agencies to support local governments in carrying out penalties
Weak regulation of online lending has seen China’s fintech space become a breeding ground for financial fraud in recent years. The P2P market began blowing up at the beginning of 2018, as the financial de-risking campaign tightened financial conditions and upended liquidity for small lenders. By summer, hundreds of lenders had collapsed, leaving lots of small-time investors out in the cold. This policy is an attempt to ensure there won’t be a repeat.