Lending in China

While many believe that nonperforming loans (NPLs), privatization of banks, informal lending, and other forms of shadow-banking, as well as technological advances in machine learning for assessing creditworthiness will place China's financial regulatory system on a trajectory toward openness and privatization, other trajectories are possible and likely. Consider that each disturbance can be met with controlled alternatives. For NPLs, there are asset management companies; for informal lending, there is new technology to lower transaction costs and increase formalization and consolidation; for systemic risk presented by other forms of shadow-banking, there is systemic isolation of the traditional banking sector which substantially lowers that risk; and while machine learning promises more accurate assessments of creditworthiness for millions of individuals and small- to medium-sized enterprises, it promises far less improvement to assessments of China's 3,500 large enterprises that present substantially different variables. Privatization and openness is not necessary for China's continued development for a time just as liberalized payment regimes and foreign direct investment rules do not imply the implementation of broad, liberal capital controls. Financial regulators in China, therefore, will continue to implement policies of limited and piecemeal openness so long as the benefits of control continue to exceed those of faster-paced development.