A Legislative Analysis Of Interest-rate Ceilings For China’s Private Lending

Private lending is one of the oldest forms of credit, having been in place overmillennia and within a wide variety of cultures in order to promote the social andeconomic operation. Due to the long lack of effective regulation, the disputes onprivate lending are emerging in an endless stream which cause all kinds of socialcontradictions and disturb the balance of financial system. To a very great extend,high interest rate of private lending is considered to be the origin that triggers all theseproblems. Regulation of the interest rates on private loans in China under Article6ofthe Opinions of the People’s Court in Hearing Cases Concerning Loans is deemed thekeynote of our country’s usury law. Generally, legislators designed usury laws toprotect consumers from creditors who charge interest rates higher than the fourfoldsimilar bank lending rates. However, Great changes have taken place in China’smacroeconomic environment due to nearly two decades of the reform of the economicsystem. Instead of the original planed economy, China has initially built up thesocialist market economic system and formed an all-dimensional opening scenario,which means it is futile and unjust to measure the legitimacy of private lending in ourcurrent economic structure based on an interest-rate ceiling prescribed20years ago.The thesis intends to survey an argument for interest-rate ceiling through anin-depth evaluation of the merits of modern economic justifications for usury laws.With a series of discussion on the legal issues of private lending cases, combined with the other major countries’ experience in interest rate regulation mode, it is highlyrecommended that we shall endeavor to construct a system which isclassification-guided and bears the color of dynamic adjustment and risk-control so asto channel private funds into capital markets and promote interest rate liberalization．This thesis consists of five parts. Part I of this thesis examines the merits andcriticisms of interest-rate ceilings in domestic and overseas. According to thedevelopment of our country’s debt market and the legal principle applied in ourcountry’s legislation, it is addressed that, before the realization of interest-rateliberalization, interest-rate cap management is deemed an important tool to adjustChina’s current private lending market.Part II of this thesis outlines the history of usury laws and points out theirrationality of our current interest-rate ceilings centered on Article6of the Opinionsof the People’s Court in Hearing Cases Concerning Loans stipulated two decades ago.Part II also focus on a serious of private loan cases based on judicial practice,addressing the legal issues such as the criteria for determining the applied interest-ratewhen overdue interest is not prescribed in the contract, the relationship between theoverdue interest and overdue penalty, the problem of compound interest in privateloans, the presumption rules of interest-rates when the lending contract is ambiguous.Part III of this thesis starts to introduce the overseas main countries’ usury laws.There are three kinds of interest-rate ceilings in modern society. One is based on theadministrative rules represented by the United States. The other is represented by theGerman ruling idea of the civil justice adjustment. The third one is somewherebetween the objective mode, which set a certain interest-rate ceiling required by thegovernment but the upper limit is flexible, or the subjective mode, where the judgewill consider the age and business experience of the borrower and as well as thedegree of risk and the guarantees required by the lender and his costs, if, in relation tothe above, the court deems the lending conditions usurious, it can make the contractfair by reducing the rates and by altering the contract clauses after a fact by the judgediscretion to limit to some extent on the amendment.Part IV of this thesis offers several suggestions so as to reform our current interest-rate ceilings. It is recommended that while formulating the law concerningregulation of loans in the future，we should re-establish the interest-rate caps throughmathematical models and empirical analysis, implement a differentiated regulationupon commercial credit and commercial credit, judge the private loans disputes withthe combination of subjective and objective, and endeavor to construct a system thatis classification-guided and bears the core of lenders system in order to channelprivate funds into capital markets．Part V of this thesis makes summaries and conclusions on the strength offoregoing analysis, and presents suggestions to legislations and judicial practice oflocal China.