Study On Legal Regulation Of Private Lending In China

In China, private lending has existed for a long time. Ever since the reform andopening up, private lending has made a great contribution to the economicdevelopment of China. With the development of the private economy, entrepreneurs’and individuals’ demand for capital has increased as well. Because the financialresources have been monopolized, it is not easy for private enterprises to get loansfrom standard financial institutions. Therefore, they resort to private funds. In thisway, private lending has significantly increased.Since the economic crisis in2008, many enterprises have problems in theircapital chains, needing a lot of capital to bridge the gap. As a result, they are preparedto pay relatively high interest rates. Meanwhile, continuous sub-inflationary interestrates combined with a shortage of investment channels mean private surplus capitalnaturally flows towards private lending. Without proper regulation, however, privatelending has always been a gray area, unable to play its supplementary role to thestandard financial institutions. Moreover, it could even be counterproductive to thefinance industry, causing social instability. In short, private lending urgently needs tobe regulated.This dissertation is divided into four parts. By using lots of case studies and data,it analyzes the current status of private lending, elucidates its advantages and existingshortcomings, and explains the necessity of regulation. Based on the currentregulatory framework, this essay focuses on improving the regulation of privatelending, and puts forward some suggested reforms.The first part analyze the current situation of private lending in China and thenecessity for regulation. By studying the development of private lending in thecountry, it is not hard to see that production-oriented private lending results fromfinancial monopoly and it develops rapidly in a time of sub-inflationary interest ratesand high demand. It is widespread, has a high interest rate and is secretly carried out.To some extent, private lending is conducive to the development of enterprises andthe regional economy. However, it also easily leads to blind investment and loan disputes. Sometimes it even involves illegal financial activities. Therefore, withoutregulation, private lending could easily disrupt the financial order and weaken thestate’s macro-economic control. Due to the negative effects it brings, private lendingshould be regulated.The following two parts analyzes the current regulatory system on privatelending in China and its defects. China does not currently have a complete legalsystem to regulate private lending.<General Principles of the Civil Law of thePeople’s Republic of China> states only that legitimate loan relationships areprotected by the law; and in <Real Right Law of the People’s Republic of China>, itstates the rights the mortgagor and mortgagee enjoy when the mortgagor fails to payhis/her due debts. Finally, in <Contract Law of the People’s Republic of China>, it isstated that under a contract for loan of money between natural persons, if payment ofinterest is not agreed or the agreement is not clear, the loan is deemed interest free.While China’s legal system has some terms to protect legal private lending, it has alsoset some terms to limit the development of private lending. For example, in thedocument <Several Opinions of the Supreme People’s Court of the People’s Republicof China for People’s Courts on Adjudicating Lending Cases>, it is stated that theinterest rate for private lending can be higher than that of bank loans, but loans withinterest rates more than four times higher are not protected by the law. In addition,<Criminal Law of the People’s Republic of China> has set some rules to curb thedevelopment of illegal financial activities in the name of private lending. However,though China in general has sought to curb the development of private lending, thecountry also encourages and guides the healthy development of it by supportinginformal finance, corporate credit and market-oriented interest rates.The fourth part is the most important part of the whole dissertation. From theperspective of industry, government and law, it puts forward some specific advice onimproving the regulation of private lending. It is essential to promote thedevelopment of private lending and improve the associated legal framework. The lawshould clarify the spectrum of legal private lending and properly curb ultra-highinterest rates, establish widely applicable lending contract templates, and draw a cleardistinction between private lending and illegal financial activities. To better regulate the private financial market, we should make private lending transparent, set upmarket access and withdrawal mechanisms, and register all private lending activities.In addition, we should make it possible for small-sized enterprises to have equalaccess to financial credit resources. In this way, we can restrain usury loans. Givingtax cuts and other preferential policies to private lending could lead private capital tothe real economy, creating wealth and at the same time regulating private capital.Meanwhile, allowing the market to dictate interest rates is good for the developmentof private lending in the long run. In addition, setting up private self-regulatoryorganizations could better serve the free and healthy development of private lending.To better develop private lending and improve and stabilize China’s financial system,we should accelerate our steps to construct the financial legal system, to improvefinancial regulatory mechanisms, and to make regulation more effective.