Entries in China (2)

Tuesday
May122009

Qifang: Does Hidden Potential Bubble Under the Surface of China's Copycat P2P Lenders?

China places special focus on educationBack in February we wrote about the increasing popularity of P2P lending in China. Today we are profiling another Chinese peer-to-peer lender called Qifang. Qifang is a new specialized lending platform that connects Chinese university students with lenders who can help fund their educational expenses. Lenders can be institutions such as banks, companies, NGOs, or individuals. Lenders can also be philanthropists that help finance educational expenses through donations. In this aspect, Qifang’s model builds on that of Kiva and Propser in the West.

However, upon closer observation we realize that Quifang’s model does not simply build on that of other P2P lenders; it outright mimics them. Upon submitting an acceptance notice or student ID, Qifang borrowers create a profile that has striking similarities to borrower profiles on Prosper, including a link to “endorsements from friends” (Prosper's special tool for leveraging social networks). Even more original is that borrowers set their own interest rates and terms allowing lenders to bid on borrowers based on the interest rates they set. 

And while I am looking through Qifang’s website I keep trying to put my finger on something else that is giving me déjà vu but what could it be? Ah, yes, the site’s design and colors are near mirror images of Zopa’s warm, orange stripe beneath a thinner black stripe. The recent Economist article on Qifang was right to reference the “shameless” copycat startegies of Chinese Dotcoms which have come to be known as “copy to China.”

Shameless it may be, but Qifang might also be brilliant. Education is stressed in Chinese society and the demand for education loans exists. As the Economist article explains, education loans have generally been provided by community groups, thus Qifang is simply taking something that already exists organically (real, on-the-ground P2P lending) and making it more transparent, efficient and scalable.

Additionally, Qifang may have replicated the model and design of Western P2P lenders but it has also learned from their mistakes. Taking into account unique aspects of Chinese culture, Qifang has built into its model tools that provide social collateral, reduce risk, and leverage the strong community ties found in Chinese societies. Social collateral comes in the form of required submission of certain family details which discourage borrowers from defaulting for fear of publically shaming their family. Similarly, by sending all loan payments straight to the school, Qifang decreases risk to lenders that may come about as a result of misused moneys. Last, Qifang encourages teachers, parents, and community lenders to become involved with loans as a way to increase both financial education and the social incentive to repay.

At about six months old, Qifang is too young for us to predict how well it will operate. However, looking at the profile of one young Chinese girl who has titled her loan as “I cannot witness my mother working hard for me every day, I have to rely on myself and be strong” and reading about the “honor” that she feels to be able to borrow from Qifang lenders, I can’t help but feel that powerful cultural forces beyond my understanding are at play. And this makes me wonder if P2P models are better suited for cultures where traditional (and sometimes seemingly constraining) social norms and bonds remain strong and undisputed?

Flicker credit: cleverCl@i®ê

Sunday
Feb222009

China: The Newest and Oldest Fan of P2P Lending

,According to an article published earlier this month, p2p lending is gaining traction in China. The inability of individuals and small firms to access credit from state-owned banks has spurred internet p2p lenders, such as leader CreditEase, to fill the unmet demand.

Unlike p2p lending in the West, which is generally viewed as a new and innovative approach to lending, China is more familiar with the concept. Along with various other informal lending schemes, loans between individuals are legal and common in China. According to some estimates, informal lending might account for 10 to 20 percent of the country's total lending. Thus, the emergence of platforms like CreditEase are more indicative of a change in venue—the internet instead of the street—rather than a new access point to credit.  This may help explain the Chinese government's relaxed response to budding internet p2p lenders.

Innovative or not, CreditEase has generated US$29 million in loans since 2006.  Although much smaller than p2p giant Prosper, this amount is close to the US$33 million loaned by Kiva after about 3 years of operations.  The platform operates by selecting borrowers and then diversifying investors' funds among numerous loans. With reported returns of over 12 percent, and defaults under 1 percent, CreditEase seems bound for smooth sailing.

What will be interesting to see is whether the demand for CreditEase’s services will continue to grow. China’s loosening of credit quotas for commercial banks (by 5 percent) and local commercial banks (by 10 percent) may have an impact on the growth of p2p markets in the country. A recent article on credit in China mentions that informal lending flourished when credit quotas were in place and that the recently observed increase in bank loans may partly represent a flow from informal to formal lending.

Flicker credit: upton