The Regulation of Private Lending in China

This thesis mainly explores legal and regulatory issues regarding the private lending market in China, which is a vital element of the country’s shadow banking system and used by millions of private businesses as an alternative financing channel. Over the past four decades, China said goodbye to the old centrally planned economy and embraced Adam Smith’s free market ideology. It has witnessed the rapid growth of private capitalism as local entrepreneurs started their business ventures to pursue personal wealth. In contrast to the well-known story of China’s economic achievements, how Chinese businesses are being financed remains a secret. In fact, most entrepreneurs have been facing severe financing difficulties, for the state- dominated banks often refuse to lend to the private sector. Therefore, they can only rely on private financing to borrow money, giving rise to a massive private lending market running outside of the official regulatory regime. In recent years, the shadow banking system has encountered a series of credit crises when numerous borrowers failed to repay high-cost private debts as a result of the slowdown of Chinese economy. It caused investors heavy financial losses and led to a large number of corporate bankruptcy cases. Many bosses chose to abandon their companies and run away to evade debts. Against this background, this thesis is a timely work to investigate China’s shadow banking system and answers the following questions: First, how the private lending market has evolved into a major form of alternative finance for private businesses; Second, what factors contributed to the private lending crisis, what impacts the crisis had on relevant stakeholders, and what problems were exposed during the crisis; Third, whether the current legal framework is effective and efficient in regulating private lending activities, and if not, what can be improved; Fourth, to what extent China’s experimental financial reforms can solve the private financing puzzle; Fifth, whether British SMEs also face the similar financing dilemma as their Chinese counterparts do, and what alternative financing methods are available in the UK. After answering these questions, the thesis provides recommendations for China’s policy-makers, in terms of how to regulate private loans and creating more financing resources for private entrepreneurs.