Chinese President Xi Jinping’s campaign to reduce risk in the financial system is being felt in New York. Regulators in China are targeting the estimated 1 trillion yuan ($152 billion) online cash micro-lending industry that has drawn criticism for exorbitant interest rates and underhand lending practices. The assault on the sector threatens to stymie any new listings of such lenders on New York’s stock exchange -- as well as spelling trouble for investors in the handful of companies that have already listed.
1. What is China doing?
China plans to purge the country’s 157 online micro-lenders, leaving only large state-owned companies and the biggest internet firms intact with licenses, according to the International Financial News. Few of the existing lenders will survive, said the newspaper, which is managed by the state-run People’s Daily. Also this week, China halted approvals for new online micro-lenders. It’s a belated crackdown on an industry which has operated in a regulatory grey area.
2. What are China’s cash micro-lenders exactly?
They’re part of a sector that has swelled this past year after a 2016 crackdown on peer-to-peer lenders pushed many companies into cash micro-lending. Some offer short-term and unsecured loans to borrowers with poor credit histories. Some resort to violence to collect payments. Some charge interest rates that are effectively above 50 percent -- the legal limit is 36 percent -- by adding “transaction fees” to the regular rate. In its New York listing document, Qudian Inc. said more than half of its 2016 transactions had “annualized fee rates” exceeding 36 percent. Its revenue last year would have dropped by about 21 percent if the rates had been below the legal limit, the document showed. Qudian cut its rates to below 36 percent in April, it said.
3. Why are regulators cracking down?
The high interest rates charged by cash micro-lenders have stoked a public backlash. Some firms have been criticized for lending to Chinese students, often without seeking parental approval or requiring a credit history. And as China targets wider risks in the financial system, it was inevitable that attention would turn to the micro-lenders. Their cash-loan businesses are especially risky, according to a Nov. 21 notice from the nation’s internet finance risk management group that was distributed by the central bank.
4. What are the implications for investors?
As the regulatory net has tightened, several of the cash micro-lenders have been raising money from U.S. investors. Shares of Qudian, which listed in October, have fallen 33 percent. PPDAI Group Inc. started trading in November and has tumbled 37 percent. Any new companies planning to list may face an uphill struggle.
5. What happens next?
The regulators’ grip on the sector is likely to tighten. In July, authorities set up the Financial Stability and Development Committee to coordinate policy responses between the central bank and China’s regulatory bodies. One of its four focus areas: internet finance.
6. How big is the micro-lending sector?
There’s no official data, but consultant Yingcan Group estimates that outstanding loans from cash micro-lenders may have exceeded 1 trillion yuan. That’s a huge sum for an unregulated corner of China’s financial industry. Also, it’s not always clear who is a cash micro-lender and who isn’t. Some peer-to-peer lenders -- platforms that directly match borrowers with willing investors -- also offer short-term cash advances. The P2P lenders extended about 12 billion yuan of cash loans in October alone, up from 789 million yuan in January last year, Yingcan estimates.
7. Why is China taking on financial risk?
China’s central bank governor, Zhou Xiaochuan, has pointed to a buildup of risks that are “hidden, complex, sudden, contagious and hazardous.” By the end of 2016, total borrowing had ballooned to about 260 percent of the size of the economy, up from 162 percent in 2008. One of the main concerns is that much of the action takes place beyond the reach of regulators. China’s shadow banking sector -- unregulated loans mostly -- has the potential to put the financial system at risk, according to many analysts, and was also targeted last week by authorities. As well as the internet sector, asset management and financial holding companies are in the regulators’ spotlight.
The Reference Shelf
- China imposed limits on lending by peer-to-peer platforms to individuals and companies in an effort to curb risks.
- China has halted approvals for new online micro-lenders
- A new assault by Chinese authorities on the country’s cash micro-lenders threatens to stymie any new listings in New York.
- Peer-to-peer (P2P) loans could fade as China’s fintech growth driver: Bloomberg Intelligence.
- A QuickTake on peer-to-peer lending, another on fintech and a Q&A on China’s war on risk.
— With assistance by Alfred Liu, and Angus Whitley