Microfinancing and Home-purchase Restrictions: Evidence from China’s Online Peer-to-Peer Lending

This paper investigates whether borrowers’ home values affect their unsecured loans’ borrowing costs using data from a leading online peer-to-peer (P2P) platform in China. Taking China’s 2016 home-purchase restrictions (HPR) policy as an exogenous shock, we employ a difference-in-differences identification strategy to compare the before and after changes between homeowner borrowers from cities with and without the HPR policy. It is found that houseowners’ equilibrium interest rates decreased in those restricted cities, but No significant effect observed for borrowers without houses. Two economic channels are assessed, and we find the perceived collateral effect but no supporting evidence for the traditional pure wealth effect. Our results are robust to a series of alternative estimations. Furthermore, we provide evidence that reductions in borrowing costs are driven by lenders rather than the platform, as homeowner borrowers have faster speed of crowdfunding, more lenders per loan and a higher loan success rate. Homeowner borrowers are also found to default less ex post. Overall, our results contribute to the literature that government housing policy could still matter in an unsecured loan.