The survival guide for China's online lenders

Companies in the $150 billion sector face deep regulatory threats. They want to work with watchdogs and each other to tackle credit risks at source.

Working together with regulators is the key to the sustainable growth of China's burgeoning micro-lending sector, leading figures in the industry said on Tuesday.

Offering small, unsecured loans online has grown to become an Rmb $1 trillion ($150 billion) business in recent years. But fears about borrowers building up massive debts and resulting concerns about the stability of lenders have seen regulators step in, most recently with a move to ban new lenders in November.

Now, regulators have worked with established industry players to set up a new company intended to act as a self-regulator, improve transparency and cut the cost of funding for the sector. While some have hailed that move, others said it was vital for the industry to work more closely together to ensure consumers didn't build up unsustainable debts by borrowing from multiple lenders.

And for companies in the sector – including US-listed companies that saw their shares fall sharply after November's regulatory move – the stakes are high. The size of the industry almost doubled to Rmb1.49 trillion as of September, from Rmb830 billion in 2016, according to official data.

"For online lenders, changes in the regulatory environment have taken a toll on our performance," admitted Zhang Yue, senior vice-president at Beijing-based consumer credit company CreditEase, on Tuesday.

One development offering hope of more certainty is the establishment on January 4 of a new company, Baihangzhengxin, which means "credit union" in Chinese, by the National Internet Finance Association of China (Nifa).

Nifa, a self-regulatory body under the auspices of the People's Bank of China (PBoC) and China's securities, banking and insurance regulators, will hold a 36% stake. Eight other industry players,  including the consumer credit units of tech giants Alibaba and Tencent, will each hold 8% stakes. It is headed by Zhu Huanqi, a former PBoC and State Administration of Foreign Exchange official.

“The creation of a new regulator by the Chinese government and a group of industry players provides the best solution to rein in the explosive growth in the micro-lending industry,” Jason Wang, head of strategy management at Baidu Financial Services, said on Tuesday.

But others speaking on the same panel felt it was incumbent on the industry to work together to reduce risks and learn from abroad to address one of regulators' biggest concerns – consumers borrowing from multiple platforms to build up unsustainable debts.

In one high-profile case, a college student failed to repay Rmb160,000 worth of loans and interest from more than 30 platforms over a year. He had tried to cover his overdue payments by making new loans.

It's a particular concern because while China has long been known for its high savings rate, young people born in the 80s and 90s have gotten into the habit of borrowing at the click of a button to buy small-ticket items such as the latest iPhone. For budding entrepreneurs, the same programmes offer easy access to working capital. But this can be a risky proposition, as typical annual interest rates run to 30%.

“The online lending industry should create a centralized database to prevent a consumer to ask for loans for multiple platforms,” Zhang of CreditEase said. “There are precedent cases in Taiwan, Japan and Korea, so China should not be making the same mistake again.”

Executives from Chinese online finance companies, including Gregory Gibb, CEO of the country’s largest peer-to-peer lending platform, Lufax, said regulators and industry players were concerned about the risk of default as borrowers fail to repay the loans through multiple online platforms.

In the worst case situation, online lenders may end up paying the bill.

In an interview last year, online lender Qudian’s founder Luo Min said: “If the debts are overdue, that’s a bad debt for us… If you can’t pay, we will just give it away as welfare.”

Backed by Alibaba affiliate Ant Financial, Qudian raised $900 million in a Nasdaq listing last year, the largest US listing by a Chinese company all year.

Its shares rose more than 40% on its first day of trading in October last year, but concerns about leaks of user information and its operational ethics, as well as regulatory tightening, soon sent its shares tumbling.

The shares were down about 50% from its listing price. Perhaps its investors will feel they were the ones dishing out welfare.

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