From Folk-Lending to P2P: Monitoring Maturation in Chinese Financial Intermediation

Since the Four Modernizations program began in 1978, China has matured from a capital-starved, mono-bank-centric financial system to a capital-rich system with great variety of financial intermediation (Cousin, 2007; Lardy, 1998).  This paper plays off the double meaning of its title: first, it monitors the maturation in Chinese financial intermediation.  Surveying development of financial intermediation in China, this chapter considers the social responsibility of financial intermediaries to monitor financial contracts. 

Monitoring is defined as a costly, delegated role in which a financial intermediary gathers and uses information ex post and ex ante to structure and renegotiate a financial contract.  Monitoring is costly in that information collection and analysis requires expertise, time and money; it is delegated in that societies have given over to financial intermediaries this role to improve efficiency in banking (Diamond, 1984; Krasa & Villamil, 1992; Schumpeter, 1939) and in traded financial markets (Allen & Santomero, 1997), and to act as good stewards for their societies (Selmier, forthcoming).  

Secondly, the paper examines the maturation of the monitors themselves, in particularly those involved within the SME sector.  The chapter employs the case of Wenzhou’s financial networks (Interviews; Tsai, 2009)- highly-localized yet also the center of pan-China network of folk-lending (Lin & Chen, 2012; Liu, 1992; Shi & Ye, 2001). Financial innovation is causing a shift in SME lending from so-called folk-lending to peer-to-peer on-line lending (Interviews), but monitoring in Chinese financial intermediation lags behind innovation.  This paper integrates banking theory, public policy, sociology of finance, and Chinese development studies.

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