China’s internet finance startups could have hardly anything to complain in the first half of the year as private investors pour billions of dollars into the industry. In reality, however, the industry’s prospects may not be as bright as it seems.
Data from China Academy of Information and Communications shows total investment in Chinese fintech companies fell sharply to $1.5 billion in the third quarter from $16.2 billion in the second quarter.
In Q3 this year, only three Chinese companies managed to collect over $100 million in their fundraising, down from six companies in the previous quarter.
Investors are no longer rushing to invest in Chinese fintech startups after the government tightened foreign exchange and cross-border money transfer regulations this summer. Apparently, cross-border payment firms were among the biggest casualties.
LianLian Pay, which claims itself one of the biggest non-bank third-party payment firms in China, was fined Rmb2.21 million ($320,000) by the Chinese Foreign Exchange Administration as it didn’t adopt the declaration system for the statistics balance of international payments and violate multiple money transfer and foreign exchange regulations.
Another third-party payment platform Kayou was fined Rmb24.9 million by China central bank for more than seven violations of money transfer.
Even Ant Financial could not escape from the scrutiny. The Alibaba affiliate, which raised a record-breaking $14 billion in the world’s largest-ever private fundraising, was fined Rmb4.12 million in August.
TIGHTER REGULATIONS
Beijing is taking a tougher stance against cross-border payment firms shortly after it imposed stricter regulations against peer-to-peer lending platforms late last year.
In December last year, the central government ordered every municipal and provincial government to register all peer-to-peer lending platforms and to shut down irregular platforms by June this year.
As a result, about 218 peer-to-peer lending platforms shut down their services in July alone amid a massive wave of defaults. Thousands of people complained on social media that they could not get their money back from online lending platforms.
There are clear signs that private investors are turning cautious about Chinese P2P firms.
Furongbao, a Chinese P2P platform backed by Japanese tech giant Softbank, said in July it had secured Rmb800 million Series B funding from Guangdong Macro, a Shenzhen-listed home appliances retailer. The funding was subsequently cancelled because Guangdong Macro had concern over its debt, the target said in a statement a week later.
From P2P to cross-border payment, it appears Beijing is trying to cool the investment spree in order to prevent a financial bubble. As such, investors should be aware of the risks surrounding Chinese fintech companies in the short term.
