Why was Chinese P2P Lending driven into bankruptcy rush?

Abstract

The P2P lending suffered a big bankruptcy rush in mid-2018 in China. Prior studies explaining the reasons can be divided into external factor theory and market failure theory. The former is attributed to tight monetary policies, economic recession, and the tightening of regulations. The latter is attributed to information asymmetry and investor bias. We propose an internal factor theory that is different from prior studies. Chinese P2P lending platforms were forced to pursue scale expansion with significant risks (full guarantee risk and disclosure risk), which can cause platform bankruptcy, because the platform has a special characteristic: a financial company while being an IT company. Since this characteristic, platforms, entering the P2P lending market, are in the situation of“ prisoner's dilemma of the arms race” and are forced to scale up to monopolize the market. In other words, the reason for the bankruptcy rush is the same reason for the rapid growth of the P2P lending market. Risks that had been postponed for the expansion of scale come to the surface as the deterioration of the external environment. In short, the occurrence of the bankruptcy rush was already inevitable at the same time as the rapid growth of the P2P lending market.