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China's Lenders Want to Check Your Social Media

Adam Minter is a Bloomberg View columnist. He is the author of “Junkyard Planet: Travels in the Billion-Dollar Trash Trade.”
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There have generally been two ways to get a bank loan in China: You either have lots of assets already, or you know somebody powerful enough to pull some strings. That may be about to change -- although, at first glance, the shift might not seem for the better.

On Friday, Tencent, owner of WeChat (China’s most popular app and social networking site), said it plans to open a credit rating service, one that ranks borrowers by the "quality" of their online social networks. No longer will a prospective borrower need to cultivate a relationship with a bank VP to get a loan; instead, she may have to maintain a group of sensible and solvent online friends.

In a sense, Tencent is aiming to expand and systematize the country's existing system of credit. Personal networks, or guanxi, have long been China's primary form of social currency (not least because they offer a basis for trust in the absence of a consistent and reliable legal system). Chinese people won't hesitate to assess an individual’s social status on the basis of his social ties, and well-connected individuals have always relied on their personal relationships to secure bank loans. Under Tencent's system, anybody’s connections, no matter how modest their backgrounds, can be called upon to sway a skeptical banker.

Tencent Credit Bureau, as the subsidiary is known, also squares with the Chinese government’s long-deferred goal of making more capital accessible to the small and medium-sized entrepreneurs who create most of China’s jobs. The government had hoped loose monetary policy would be sufficient, but the easy money it has released into financial markets during the last year has mostly landed in the coffers of well-connected and inefficient state-owned enterprises, according to the Wall Street Journal. Small borrowers, especially small businesses, have been forced to turn to “alternative” lenders such as China’s usurious shadow banking sector.

Banks can’t be blamed entirely for their nepotistic approach to lending. Until now, they've lacked other ways to judge borrowers' creditworthiness. Part of the problem is that cash still dominates the Chinese economy. Of the 4.9 billion pieces of plastic in Chinese wallets in 2014, only 455 million, around 9 percent, were credit cards (the rest were debit and bank cards), and, according to China Daily, those cards belonged to a mere 20 percent of the population. Low levels of credit participation means there's no track record for private credit reporting agencies to evaluate.

In 2006, the Chinese government tried to counter this problem by establishing a credit reporting agency under the aegis of the People’s Bank of China. But, because the agency is dependent for its information on state-owned banks that are reluctant to share their data, its risk assessments tend to be too thin to be of much use. They often lack, for example, a detailed overview of a borrower's repayment history.

The government is now turning to the free market for a solution. In January, eight companies -- including Tencent -- were given approval to start private consumer credit rating agencies.

Lacking access to traditional types of data, these businesses are forging their own measures of creditworthiness. For example, Alibaba’s entry, Sesame Credit Management, will mine user data from Alipay, the company’s third party payment site. Late on a payment for an order of widgets purchased on Taobao, the online marketplace? Alipay and Sesame will know -- and so will anyone requesting your credit report.

Tencent also has access to commercial data (though not nearly as much) via information culled from its shopping platform, its newly licensed WeBank (China’s first online bank) and its forthcoming brokerage. But its greatest advantage over competitors is its ability to combine that data with information culled from the interactions of its 800 million social media users. Though the company hasn’t offered many specifics about how it plans to use social networking data, state-owned China Daily reports that the company is a firm believer in the idea that “birds of a feather flock together.” Tencent has said that information about online behavior will “help financial institutions know their potential debtors better.”

So far, at least, nobody in China has raised privacy concerns over Tencent's proposal to allow private lenders to peer into users' digital social interactions. What remains to be seen is whether credit ratings might, in turn, influence how Chinese social media users select their online friends in the first place. After all, part of the reason Americans pay their credit cards on time is for fear of damaging their credit ratings. In the same way, a person in China who is interested in a mortgage might soon feel inclined to cut ties with old friends with a track record of not paying their bills. 

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

To contact the author on this story:
Adam Minter at aminter@bloomberg.net

To contact the editor on this story:
Cameron Abadi at cabadi2@bloomberg.net