Regulators have moved to rein in China's booming micro-lenders, sending shares of several US-listed firms that offer small, unsecured loans online slumping.
For investors, it's another stark reminder of the regulatory perils that can suddenly undermine a lucrative and fast-growing sector of China's ever-changing economy.
The People's Bank of China (PBoC) has banned provincial governments from approving the creation of new internet micro-lending firms, a type of fintech company that offers short-term, small loans for any purpose. It has also banned "recently approved" firms from conducting any new lending outside their home province, though it did not define "recently approved". The PBoC's order, of which FinanceAsia has obtained a copy (see below), began to circulate in the financial community on Tuesday night and takes effect immediately.
“In recent years, some regions have one after the other approved the establishment of online micro-lenders, or allowed them to roll out online micro lending business. And there are big hidden risks in the ‘cash loan’ business conducted by some firms,” said the PBoC document, which was dated November 21 and marked “extra urgent”.
The share prices of several US-listed such Chinese financial firms that offer cash loans slid dramatically after the regulation came to light.
Shares of China Commercial Credit were down 9.24%, Jianpu Technology (also known as Rong360) dropped 12.16%, and PPDAI Group fell 15.5 %, for example, as of 11.45am Eastern Time. Qudian, which debuted last month, was trading down 8.1% as of 11.45am, but it had actually dipped more than 32% before the market opened. It announced a $100 million share repurchase program at 9.20am ET.
Emerging out of the “payday loan” concept that became popular in the US in the 1990s, the cash loan business in China had lacked a clear regulatory framework, partly due to the fact the sector only really picked up in recent years.
Broadly, micro-lending refers to any short-term (six months or less), unsecured, small (sometimes less than $100) loan for an unspecified purposed. The value of these loans has already surpassed the Rmb1 trillion renminbi ($150.85 billion) mark, according to a November 21 report citing statistics from China’s online finance research firm Wangdai Zhijia.
And according to the National Committee of Experts on Internet Financial Security Technology, a Chinese government-backed industry committee, there were 2,693 online platforms offering cash loans to close to 10 million clients as of November 19.
That includes 1,044 platforms for cash loans operated through websites, 860 through public accounts on Tencent’s Wechat social media portal, and 429 through APPs. Some 800 peer-to-peer (P2P) websites also offer such unsecured short-term loans, accounting for about 16% of all platforms, according to the report published by the industry committee on Tuesday.
To many observers, the clampdown is no surprise. The risks of unsecured short-term loans are ballooning along with their size, and a standardised approach to assessing borrower’s risk profiles is still lacking.
For example, borrowers have been found to take loans from one lender to repay money from another, which cause their debt to snowball. Improper or extreme repayment-collection efforts have been compared to that of a gang in many local media reports. Ultra-high interest rates are also emerging in the industry, with Changjiang Times, a Chinese newspaper, reporting that some local online micro-lenders are charging retail borrowers interest rates of up to 1000% including all sorts of hidden fees.
Victor Ai, managing partner of Everbright-IDG Industrial Fund and Everbright-Zhongying Capital, two funds under China Everbright Limited, told FinanceAsia in an October interview that the sector had experienced exceptional revenue growth in 2017, and that “may not be a good thing”.
“There must be regulatory tightening…as there are bubbles developing in the sector and some numbers at some firm, such as bad debt rate, are clearly fraudulent,” said Ai, who also sits on the investment committee of two TMT-focused PE funds under CITIC Securities and Huatai Securities.
Where is the interest now?
One company being questioned over how it manages credit risk is three-year-old Qudian, whose backers include Ant Financial. It reported transactions worth a total of $3.8 billion in the third quarter, up 219% year-on-year, leading to a net income of $97.8 million, up 322% from the third quarter a year ago.
Qudian, which means “an interesting shop” in Chinese pinyin, surely attracted tons of investor interest in its $900 million blockbuster IPO - largest China fintech IPO to date. The shares had spiked more than 40% above the $24 per ADR listing price on the first trading day.
But approximately one month in, Qudian is now being accused of leaking user information, allegedly putting details of nearly 1 million students on sale on black market at Rmb100,000, and is faced with a rash of class-action lawsuits in the US as New York-based law firm Faruqi & Faruqi investigates the firm, among other issues.
Qudian had to deal with some bad publicity since its IPO, due to claims regarding its real interest rates, including fees, and debt-collection efforts, for example.
Responding to the accusations, Qudian's founder Luo Min had an interview with an online blogger after the listing. “If the debts are overdue, that’s a bad debt for us. And we won’t do anything to push them [the borrowers], not even a phone call. If you can’t pay, we will just give it away as welfare,” Luo said, according to an October 22 Q&A post. Luo’s speech raised another wave of questions among the financial and media communities, over Qudian’s business model.
A managing partner at a China-focused venture capital firm which has invested in cash loan platforms (though not Qudian) confessed to FinanceAsia that he acknowledged portfolio firms had in some cases “given up” on the money in the case of defaults.
But regulatory uncertainty is what is truly shaking the values and further development of these firms, according to the VC investor.
It's fair to say though that Chinese regulators, having experienced a boom-turned-bust in peer-to-peer lending, were never likely to tolerate the kind of “barbaric growth” that the P2P sector once experienced.