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Unveiling the adverse selection problem in China's digital lending market: Evidence from CHFS

Author

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  • Zhan, Zhihao
  • Zhang, Anqi
  • Zhang, Mingxin
  • Zhang, Mingxin

Abstract

Using data from the China Household Finance Survey (CHFS) 2019, we reveals a substantial adverse selection issue within China's Internet Credit Loan (ICL) market. Empirical evidence indicates that households with higher Debt-to-Income Ratios (DIR) are more inclined to apply for Internet Credit Loans (ICLs), with an average DIR of 76.9 %, constituting 20 % of ICL applications. While Internet Credit Loans (ICLs) provide alternative financing options, their high fixed interest rates undermine the potential cost advantages associated with digital technology. Adverse selection is especially pronounced in the case of operational loans. Our findings underscore the urgency for regulatory intervention to address these issues effectively.

Suggested Citation

  • Zhan, Zhihao & Zhang, Anqi & Zhang, Mingxin & Zhang, Mingxin, 2024. "Unveiling the adverse selection problem in China's digital lending market: Evidence from CHFS," International Review of Financial Analysis, Elsevier, vol. 96(PA).
    • Handle: RePEc:eee:finana:v:96:y:2024:i:pa:s1057521924005635
    DOI: 10.1016/j.irfa.2024.103631
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    Keywords

    Internet credit loan; Adverse selection; Digital finance; CHFS;
    All these keywords.

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • L86 - Industrial Organization - - Industry Studies: Services - - - Information and Internet Services; Computer Software

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