Monetary Policies versus Regulatory Policies: Management of Peer to Peer Market Interest Rates

• Published date: 01 January 2020
• Date: 01 January 2020
• Author: Cangshu Li
• DOI: http://doi.org/10.1111/cwe.12311

©2020 Institute of World Economics and Politics, Chinese Academy of Social Sciences

China & World Economy / 41–63, Vol. 28, No. 1, 2020

41

*Cangshu Li, Postdoctor, Institute of Digital Finance, National School of Development, Peking University,

China. Email: licsh@pku.edu.cn. This work was supported by the National Social Science Fund Major Project

of China (No. 18ZDA091), the National Natural Science Foundation of China (No. 71673296), the China

Postdoctoral Science Foundation and the Peking University Institute of Digital Finance Project.

Monetary Policies versus Regulatory Policies:

Management of Peer to Peer Market Interest Rates

Cangshu Li*

Abstract

This paper studies how monetary and regulatory policies manage peer to peer (P2P)

interest rates. Based on selected representative monetary and regulatory policies,

this paper nds that easy monetary policies reduce the demand for online loans, thus

reducing the market’s interest rates. Monetary policies may increase the supply of online

loans through rational expectation channels or reduce the demand for online loans

through bank risk-taking channels. Normative market-based regulatory policy enables

the P2P market to return to rationality, eliminates high-risk investors and borrowers,

and subsequently reduces market interest rates. Risk disposal-based regulatory policy

reduces market supply to some extent, resulting in a small increase in interest rates.

Both easy monetary policies and regulatory policies have a great impact on the normal

platforms. The interest rate of high-risk platforms is less affected by the relevant

policies, which is evidence that such platforms do not behave in accordance with the

nancial rules in general. Monetary policies mainly affect platforms with interest rates

in a relatively normal range, while regulatory policies mainly focus on platforms with

abnormal interest rates.

Key words: interest rate, monetary policy, P2P market, regulatory policy

JEL codes: G18, G28, G38

I. Introduction

The wide application of nancial technology (ntech) has generated fundamental changes in

economic and social activities. The digital network has not only improved the transactional

efficiency of economic activities but also built a new information-based economic system

among enterprises, consumers and the government. In the era of the digital economy, the new

nancial system represented by peer to peer (P2P) lending and other digital nancial models

Cangshu Li / 41–63, Vol. 28, No. 1, 2020

©2020 Institute of World Economics and Politics, Chinese Academy of Social Sciences

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is playing an important role in the construction of the digital economic system.

The development of ntech in China has created new impetus and has the potential

to promote high-quality economic growth (Xie et al., 2018; Huang et al., 2019),

but not without introducing risk to the industry. In recent years, P2P incidents have

frequently occurred and have become the source of economic and social risk. The

Ezubao incident in December 2015 highlighted the potential high risk of digital models

to the formal nancial system.1 Despite the implementation of new regulatory policies,

incidents continued to occur. In 2017, the government imposed regulations to ensure

that information on P2P lending platforms was listed in an ofcial system. At the end

of 2018, the regulatory department took further measures to strengthen the classified

disposal of high-risk P2P platforms and remove unqualied platforms from the market.

As of the end of 2019, 92 percent of the 6,613 P2P platforms in the market have closed

down.2 In this paper, I refer to these now defunct P2P lending platforms as high-risk

platforms. When related risks are not properly handled and resolved, they may spread to

the formal nancial system, increase the difculty of preventing systemic nancial risks

and negatively impact high-quality economic growth.

To prevent and control P2P risks, it is necessary to understand the nancial nature of

P2P. In China, P2P has always been regarded as a kind of informal nance, mainly serving

groups excluded from the formal financial system. However, P2P has been attempting

to transform from informal nance to formal nance. An important difference between

informal and formal nance is whether the market is controllable. The government can

inuence formal nance directly or indirectly through various policies, but usually cannot

impose its will on the informal nancial market, which is rarely under the effective control

of the government. The government uses the interest rate as an important indicator to

effectively regulate the nancial market. Whether the P2P interest rate can be effectively

guided by the government denes the basic nancial characteristics of P2P.

Figure 1 shows the market interest rate trends from January 2014 to June 2019.

The P2P interest rate is much higher than that of other nancial products in the market.

From 2014 to 2016, the P2P interest rate declined rapidly. Thus, it is worthwhile to

analyze whether this decline was market-driven or government-driven. Government

inuence over the P2P interest rate occurs mainly via two channels: monetary policy

and regulatory policy. Monetary policies affect all nancial markets, while regulatory

1On 8 December, 2015, the online financial platform Ezubao was investigated by Beijing police. After

investigation, Ezubao was suspected of illegally raising more than 50 billion yuan, involving 909,500

investors. The case has caused a huge social impact and great concern to the central government.

2The data is collected from a website, www.wdzj.com, which is the largest and the most popular online

information provider for P2P lending platforms in China.