Consequences of China’s 2018 Online Lending Regulation and the Promise of PolicyTech

Swift and unexpected shifts of financial regulations can have profound implications for the general population. This is evidenced by China’s abrupt transition in its stance on P2P lending in 2018. Initially embracing these platforms, the abrupt regulatory pivot to widespread shutdowns. Our empirical research, drawing upon credit application data, demonstrates how this indiscriminate approach hindered economic development opportunities for a significant portion of borrowers, particularly the underprivileged. As a remedy, we advocate for the implementation of AI-driven regulatory frameworks. Rather than a monolithic approach to all borrowers, AI helps distinguish between real financial risks and those that can be managed. This nuanced strategy safeguards individuals’ economic progression, while efficiently mitigating financial hazards. For policymakers and industry stakeholders, our findings underscore the importance of contemplating the broader ramifications of regulatory decisions and harnessing innovative methodologies, such as AI, to strike an optimal balance.