Shuli Ren is a Bloomberg Gadfly columnist covering Asian markets. She previously wrote on markets for Barron's, following a career as an investment banker, and is a CFA charterholder.

Stop panicking about China's online lenders. The real target of the crackdown is rogue local governments.

An item on licenses published late Wednesday by International Financial News, a subsidiary of the state-owned People's Daily, exacerbated the selloff in fintech lenders. Qudian Inc. is now down 33 percent from its flashy listing a month ago, while PPDai Group Inc. is 37 percent below its IPO price.

Investors may be misinterpreting the headlines.

Financial News said government entities can't issue new licenses for internet micro-lending beyond the 157 institutions that already have them. The consequences were immediate: Zhejiang Busen Garments Co., for one, said in a filing Thursday it's terminating plans to set up an online lender.

In theory, though, banning new competitors ought to give established lenders an advantage. What really worries China is municipalities going rogue again, in the manner of local government financing vehicles.

As of September, there were 8,610 micro-lenders with 970 billion yuan ($147 billion) of loans outstanding. Many of those weren't licensed by national regulators such as the People's Bank of China or the China Banking Regulatory Commission, which have strict rules.

Rather, authorization was handed out by local governments, most of which have no fintech expertise, to companies claiming to be affiliated with state-owned enterprises. The Finance News article pointed the finger at Jiangxi province, one of China's poorest, saying almost all the 201 licenses issued there will be suspended.

Financial risks aside, China is worried about optics. Micro-lenders can legally charge up to 36 percent annual interest, and their practices can quickly turn predatory in the provinces. As of September, Jiangxi's lenders had 22.8 billion yuan of loans outstanding -- almost twice as much as in more affluent Beijing.

Jiangxi's mostly poor borrowers are a world away from the young, spendthrift customers of Qudian, based in the capital, who just want an iPhone X on credit.

Wild Wild West
China is worried micro loans are flourishing too fast in the poorer provinces
Source: People's Bank of China

According to the Financial News item, further micro-lending licenses will be issued only to central state-owned enterprises, preferably those in financial services, and large internet companies such as Alibaba Group Holdings Ltd.'s affiliate Ant Financial, Inc. and Baidu Inc. Operators that falsely claim to be affiliated with state-owned enterprises will have their permission revoked. Beijing doesn't want so much as a whiff of headlines about poor farmers committing suicide because they couldn't honor payday loans from state-affiliated firms.

I do see one major roadblock to the growth of online consumer lending: The new rule that micro-loans can no longer be packaged and securitized. As I've said, asset-backed securities -- based on everything from auto loans to rental properties -- are the rage in China these days. Together, Ant Financial, Baidu and JD Finance have sold more than 14 billion yuan of ABS this year, according to data compiled by Bloomberg.

Busy Packaging
Ant Financial, JD and Baidu issued more than 14 billion yuan of ABS this year
Source: Bloomberg

Now that the government is shutting financing channels such as peer-to-peer lending and ABS, the micro-lenders are destined to become fintech platforms, connecting potential borrowers with bank loans.

And that's no bad outcome.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Shuli Ren in Hong Kong at

To contact the editor responsible for this story:
Paul Sillitoe at