Billionaire Ma’s Alibaba Gets Nod to Stir Up Loans: China Credit

China has authorized billionaire Jack Ma’s Alibaba Group to expand funding for its online loans business, designed to shake up an industry divided into heavily regulated state banks and shady financing schemes.

The Chinese Securities Regulatory Commission approved the sale of up to 5 billion yuan ($815 million) of notes backed by loans from Alibaba, according to a July 8 filing. Since starting its microloans business three years ago, Alibaba has extended more than 100 billion yuan of financing to over 320,000 small online businesses and entrepreneurs, it said in an e-mailed statement.

Alibaba’s Ma said an outsider was needed to “stir things up” after restrictions on bank credit spurred property developers and entrepreneurs to seek funds from curbside lenders. Chinese regulators have sought to reduce risks taken in so-called shadow banking, which has assets of 36 trillion yuan according to JPMorgan Chase & Co. estimates, by forcing more products to be publicly traded and squeezing access to funding with a record cash crunch.

“The government wants something that is more effective,” said Victor Wang, a Hong Kong-based analyst at Macquarie Group Ltd. “The loans that Alibaba offers are all for small and micro enterprises, which is something that the government wants. Traditional banks usually cater to state-owned enterprises.”

Small Loans

Alibaba operates China’s largest e-commerce company. It runs platforms including Taobao Marketplace and that connect retail brands with consumers, a cross between Inc. and EBay Inc. The transaction history of smaller companies on its sites could help gauge their credit history, said Richard Ji, former Morgan Stanley analyst who is now raising his own fund, All-Stars Investment Ltd. to focus on Internet companies.

“It’s very hard to service small- and medium-sized enterprises,” Ji said. “There are too many of them and the loans that they take are too small.”

The average size of Alibaba’s loans is 40,000 yuan, and the non-performing loan ratio was 0.87 percent as of the second quarter of this year, the company said. That’s less than the 0.96 percent average for commercial banks as of March 31.

Alibaba’s push into finance comes as borrowing costs for Chinese banks surged the most in at least six years last month on concern a record cash crunch threatened to swell bad loans. Premier Li Keqiang has tried to rein in debt expansion after the government’s broadest measure of credit rose to a record 6.16 trillion yuan in the first quarter, even as economic growth has slowed. Gross domestic product rose 7.5 percent in April-to-June from a year earlier, the National Bureau of Statistics said in Beijing today, down from 7.7 percent in the first quarter.

Shadow Banking

New yuan loans in China fell to 860.5 billion yuan last month from 919.8 billion yuan a year ago, data July 12 showed. Bad loans at banks including Industrial & Commercial Bank of China Ltd. have increased for six straight quarters through March 31, the longest streak in at least nine years.

So-called shadow lending has grown as an estimated 97 percent of the nation’s 42 million small businesses can’t get bank loans, according to Citic Securities Co. The industry may be 69 percent as large as China’s annual economic output, JPMorgan estimated in May.

Debt Risk

Concerns that some companies may not be able to meet debt payments amid the slowing growth have pushed five-year credit-default swaps insuring China’s sovereign notes against non-payment up 30 basis points since May 31 to 116.6 basis points. The contracts pay the buyer face value in exchange for underlying securities or the cash equivalent if a borrower fails to adhere to its debt agreements.

The yield on the country’s benchmark 10-year government bond has climbed 16 basis points in the same period to 3.6 percent.

The yuan closed at 6.1375 per dollar in Shanghai on July 12. The currency’s appreciation has stalled in the past month, limiting this year’s advance to 1.5 percent.

Orient Securities Co., based in Shanghai, received approval to sell the products backed by the Alibaba loans, according to the July 8 filing to the Shenzhen Stock Exchange. The notes will be divided into three classes, with 75 percent of the money raised coming from securities backed by prime assets, according to a person familiar with the matter, who asked not to be identified because the details are private.

Whale Potential

Alibaba charges borrowers an average annualized interest rate of 6.7 percent, the company said in an e-mailed statement. That’s near the central bank’s 6 percent benchmark one-year lending rate. By comparison, interest charged by a microcredit firm in Guangzhou run by Joe Zhang, former deputy head of China investment banking at UBS AG, is about 24 percent.

The CSRC approval allows Alibaba to boost its loans by as much as the maximum 5 billion yuan it can sell of the notes. Currently it can lend out at least 2.4 billion yuan, financed mainly with shareholder equity and bank loans, according to Chai Liang, a company spokeswoman.

China had 6,080 microlenders licensed by the People’s Bank of China as of the end of last year, with outstanding loans of 592 billion yuan, according to the central bank. That means that the average microlender’s outstanding lending is only 97.4 million yuan.

Alibaba’s financial business is stirring things up like “a catfish” and has the potential to become “a whale,” Macquarie’s Wang said. “Its big data and experience in IT gives it great advantages compared with traditional financial services.”

The group’s financial affiliate, Alibaba Small and Micro Financial Services Group, contains two loan companies. Its Paypal-like third party payment system Co Ltd, which has more than 800 million registered accounts, is also part of this group.

“Finance is the missing piece in Alibaba’s business operations,” said All-Stars Investment’s Ji. “In the future the most scalable and profitable part of Alibaba’s business could be its financial platform.”

Before it's here, it's on the Bloomberg Terminal.