Skip to main content

Market-Based Regulatory Responses to Private Lending in China: Beyond a Law and Society Paradigm

  • Wei SHEN

Along with China’s economic downturn, there has been an increase in the size of China’s underground lending market. The mounting risk in connection with this underground lending market triggers tremendous interest and debates over appropriate and effective regulatory responses. Because of its private and non-transparent character, the underground lending market is likely to confound those seeking to find “black letter” law governing its regulatory framework. Instead of relying on its conventional tighten-up strategy—using the muscle of the Criminal Law—China has orchestrated an experiment by allowing local legislation to formalize part of the underground lending market, as well as a judicial approach by recognizing a higher interest rate charged by underground lenders to borrowers. This article tries to understand the underlying rationale of regulatory and judicial movements through both law and society, and law and finance lens.

Hide All

Dean and Professor of Law, Shandong University Law School. The author gratefully thanks Professor Thomas Stanton for his valuable comments on an earlier draft of this article and Rochelle MacKenzie-McQueen for her excellent editing input. Correspondence to Shen Wei, No. 5 Hongjialou, Jinan City, Shandong Province, China 250100. E-mail address:

Hide All
Allen, Franklin, Qian, Jun& Qian, Meijun (2005) “Law, Finance and Economic Growth in China.” 77 Journal of Financial Economics 57116.
Angkinand, Apanard P., Sawangngoenyang, Wanvimol& Wihlborg, Clas (2010) “Financial Liberalization and Banking Crises: Cross-Country Analysis.” 10 International Review of Finance 263292.
Awrey, Dan (2015) “Law and Finance in the Chinese Shadow Banking System.” 48 Cornell International Law Journal 149.
Ayyagari, Meghana, Demirgüç-Kunt, Asli& Maksimovic, Vojislav (2010) “Formal Versus Informal Finance: Evidence from China.” 23 Review of Financial Studies 30483097.
Barboza, David (2011) In Cooling China, Loan Sharks Come Knocking,” New York Times, 13 October.
BBC (2011) “China to Control Shadow Banking and Private Lending,” BBC News, 19 October.
Beck, Thorsten, & Demirgüç-Kunt, Asli (2006) “Small and Medium-Size Enterprises: Access to Finance as a Growth Constraint.” 30 Journal of Banking and Finance 29312934.
Beck, Thorsten, Demirgüç-Kunt, Asli& Levine, Ross (2004) “Finance, Inequality and Poverty: Cross-Country Evidence.” No. 10979 NBER Working Paper, online <> (last accessed 11 November 2016).
Beim, David O., & Calomiris, Charles W. (2001) Emerging Financial Markets, New York: McGraw-Hill.
Berger, Allen N., & Udell, Gregory F. (1998) “The Economics of Small Business Finance: The Roles of Private Equity and Debt Markets in the Financial Growth Cycle.” 22 Journal of Banking and Finance 613673.
Bloomberg (2013) “Regulating China’s Shadow Banking System Isn’t Easy,” Bloomberg News, 25 April.
Bloomberg (2014) “Private Lending ‘Legal’ in Wenzhou,” South China Morning Post, 3 March, online <> (last accessed 7 November 2016).
Bosworth, Barry P., Carron, Andrew S.& Rhyne, Elisabeth H. (1987) The Economics of Federal Credit Programs, Washington, DC: The Brookings Institution.
Boyd, Bradley K (1988) “The Development of a Global Market-Based Debt Strategy to Regulate Private Lending to Developing Countries.” 18 Georgia Journal of International and Comparative Law 461463.
CBRC (2014) “CBRC Vice Chairman Yan Qingmin Attended Small- and Micro-Sized Financial Service Sub-Forum of Boao Forum for Asia,” online <> (last accessed 7 November 2016).
Chung, Olivia (2011) “China Squeeze Drives Boom in ‘Black’ Banks,” Asia Times, 26 August, online <> (last accessed 7 November 2016).
Claessens, Stijn, & Perotti, Enrico (2005) “The Links between Finance and Inequality: Channels and Evidence.” No. 33652 World Bank Working Paper, online <> (last accessed 7 November 2016).
Demick, Barbara (2012) “Death Sentence for Business Woman Arouses Opposition in China,” Los Angeles Times, 17 February.
Dollar, David, Hallward-Dreimeier, Mary Shi, Anqing Wallstein, Scott Wang, Shuilin& Xu, Lixin Colin (2003) Improving the Investment Climate in China: Investment Climate Assessment, Washington, DC: World Bank and International Finance Corporation.
EJI Insight (2013) “Wenzhou Banks’ NPL Ratio Hit 28-Month High,” EJI Insight, 3 December.
Farrell, Diana, Lund, Susan Rosenfeld, Jaeson Morin, Fabrice Gupta, Niyati & Greenberg, Ezra (2006) “Putting China’s Capital to Work: The Value of Financial System Reform,” McKinsey Global Institute Report, May.
Financial Times (2015) “Chinese SOEs: Hope over Experience,” 15 June.
Honkapohja, Seppo (2014) ““Lessons from the Financial Liberalization in the Nordic Countries in the 1980s,” in W.T. Woo, Y. Pan, J.D. Sachs & J. Qian, eds., Financial Systems at the Crossroads: Lessons for China, Singapore: World Scientific Publishing, 135165.
Honohan, Patrick (2008) “Cross-Country Variation in Household Access to Financial Services.” 32 Journal of Banking and Finance 24932500.
IMF (2014) “Financial Access Survey,” online <> (last accessed 7 November 2016).
Kaminsky, Graciela L., & Schmukler, Sergio L. (2003) “Short-Run Pain, Long-Run Gain: The Effects of Financial Liberalization.” No. 9787 NBER Working Paper, online <> (last accessed 7 November 2016).
Lardy, Nicholas (1998) China’s Unfinished Economic Revolution, Washington, DC: The Brookings Institution.
Lardy, Nicholas (2014) “China’s Rise Is a Credit to Private Enterprise Not State Control,” Financial Times, 15 September.
Leung, Chris (2014) “It’s Far From Enough to Only Adjust Stock Structure of SOEs,” 11 August, online <> (last accessed 7 November 2016).
Lin, Justin Yifu, & Li, Yongjun (2001) “Promoting the Growth of Medium and Small-Sized Enterprises through the Development of Medium and Small-Sized Financial Institutions.” 1 Journal of Economic Research 1018. (in Chinese).
Linton, Katherine Connor (2006) “Access to Capital in China: Competitive Conditions for Foreign and Domestic Firms.” Journal of International Commerce and Economics, online <> (last accessed 7 November 2016).
Luo, Jun, & Prasso, Sheridan (2013) “China’s Banking System and Access to Credit,” Testimony before the US-China Economic and Security Review Commission, 7 March, online <> (last accessed 7 November 2016).
Mao, Junhua, & Jing, Luo (2011) “An Analysis of China’s Underground Lending.” 11 Capital Markets 4647 (in Chinese).
Martin, Michael F (2012) “China’s Banking System: Issues for Congress,” 20 February, online <> (last accessed 7 November 2016).
McDonald, Joe (2012) “China’s Unofficial Lending Falters, Savers Protest,” Salon, 17 February.
McKinnon, Ronald I (1973) Money and Capital in Economic Development, Washington, DC: Brookings Institution.
Miller, Ken (2010) “Coping With China’s Financial Power.” 89 Foreign Affairs 96109.
OECD (2014) Financing SMEs and Entrepreneurs: An OECD Scoreboard, Paris: OECD Publishing.
Pettis, Michael (2013) Avoiding the Fall: China’s Economic Restructuring, Washington, DC: Carnegie Endowment for International Peace.
Pierson, David (2011) “Shaky Underground Banking System Raises Fears in China,” Los Angeles Times, 14 October.
Pistor, Katharina (2013) “A Legal Theory of Finance.” 41 Journal of Comparative Economics 315330.
Prabha, Apanard (Penny), & Ratnatunga, Minoli (2014) Underground Lending: Submerging Emerging Asia?, Santa Monica: Milken Institute.
Rajan, Raghuram, & Zingales, Luigi (2003) Saving Capitalism from the Capitalists, Princeton: Princeton University Press.
Rapoza, Kenneth (2012) “A China Millionaire’s Brush with Death,” Forbes, 21 April.
Reinhart, Carmen M., & Rogoff, Kenneth S. (2011) “A Decade of Debt.” No. 16827 NBER Working Paper, online <> (last accessed 7 November 2016).
Sen, Sunanda (2005) “Finance in China after WTO.” 40 Economic and Political Weekly 565571.
SMU (2008) “A Tale of Two NGOs: Bangladesh’s Grameen Bank and BRAC,” Singapore Management University, 4 February.
Stanton, Thomas H (2012) Why Some Firms Thrive while Others Fail: Governance and Management Lessons from the Crisis, Oxford: Oxford University Press.
UN (2008) “Doha Declaration on Financing for Development: Outcome Document for the Follow-Up International Conference on Financing for Development to Review the Implementation of the Monetary Consensus,” online <> (last accessed 7 November 2016).
UN Human Development Report (2003) Millennium Development Goals: A Compact Among Nations to End Human Poverty, Oxford: Oxford University Press.
Wildau, Gabriel (2015) “Beijing’s Overhaul of State Groups Faces Compromise,” Financial Times, 15 September.
World Bank (2012) “Enterprise Surveys: China,” online <> (last accessed 7 November 2016).
Wu, Guolian (2011) “An Investigation into the Current Underground Lending Market.” 8 Zhejiang Finance 2527 (in Chinese).
Xinhua (2010) “China Shuts Down 500 Underground Banks in 8 Years: Ministry,” Xinhua News, 22 November.
Xu, Hongshui (2001) “Financing Gap and Minimization of Transaction Cost: Why SMEs Have Problems in Financing and How to Improve the Policy.” 11 Journal of Financial Research 4753.
Yang, Chen (2014) “Wenzhou to Legalize Private Loans,” Global Times, 18 February.
Yang, Yan, & Mitchell, Tom (2016) “China’s Private Sector Misses Out on Credit Boom,” Financial Times, 3 July.
Zhang, Nan, & Wong, Perry (2014) Sustainable Microfinance in Asia: Landscape, Challenges, and Strategies, Santa Monica: Milken Institute.
Zhao, Hongmei, & Qing, Koh Gui (2011) “China’s Runaway Bosses Spotlight Underground Loan Market,” Reuters, 29 September.
Recommend this journal

Email your librarian or administrator to recommend adding this journal to your organisation's collection.

Asian Journal of Law and Society
  • ISSN: 2052-9015
  • EISSN: 2052-9023
  • URL: /core/journals/asian-journal-of-law-and-society
Please enter your name
Please enter a valid email address
Who would you like to send this to? *



Full text views

Total number of HTML views: 10
Total number of PDF views: 109 *
Loading metrics...

Abstract views

Total abstract views: 354 *
Loading metrics...

* Views captured on Cambridge Core between 30th January 2017 - 21st March 2018. This data will be updated every 24 hours.