China’s debt crack­down hits cash loan providers

China’s fi­nan­cial reg­u­la­tors have in­tro­duced new mea­sures aimed at re­strict­ing the in­dus­try, which is es­ti­mated to be worth around $151.5 bil­lion.

The Sunday Guardian - - Business - REUTERS

Ex­ec­u­tives from Chi­nese com­pa­nies spe­cial­is­ing in of­fer­ing con­sumers small, easy-to­get loans be­came some­thing of a fix­ture on Wall Street this year.

Led by com­pa­nies such as Qu­dian Inc and PPDAI Group Inc, the Chi­nese mi­cro-lenders raised $ 1.2 bil­lion with splashy US list­ings, cash­ing in on a boom in bor­row­ing by con­sumers in China with lit­tle ac­cess to tra­di­tional banks.

How­ever, the for­tunes—and share prices—of the mi­crolen­ders have slumped in the past week as Bei­jing clamped down on risks in the fi­nan­cial sys­tem, ze­ro­ing in on the fast-grow­ing and loosely-reg­u­lated mar­ket for un­se­cured “cash loans”.

On Fri­day, China’s fi­nan­cial reg­u­la­tors in­tro­duced new mea­sures aimed at re­strict­ing the in­dus­try, which is es­ti­mated to be worth 1 tril­lion yuan ($151.5 bil­lion).

China has long been known as a na­tion of savers, but con­sumers are rapidly em­brac­ing debt from non-bank on­line plat­forms. The num­ber bor­row­ers tak­ing out cash loans from the mi­cro-lenders is grow­ing at an un­prece­dented rate, ac­cord­ing to the lend­ing com­pa­nies and the gov­ern­ment.

For bor­row­ers, the easy loans can be a risky propo­si­tion— es­pe­cially if they fall be­hind on pay­ments. The loans are usu­ally in the range of 1,000 yuan; in­ter­est is typ­i­cally about 36 per­cent an­nu­ally, and penalty charges and com­pound in­ter­est can quickly add up, ac­cord­ing to bor­row­ers.

The num­ber of re­peat bor­row­ers is ris­ing, which could sig­nal fi­nan­cial stress on bor­row­ers, an­a­lysts say. The com­pa­nies, how­ever, say the re­peat lend­ing is just a sign of the at­trac­tive­ness of their plat­forms.

The Peo­ple’s Bank of China and the China Bank­ing Reg­u­la­tory Com­mis­sion did not re­spond to faxed re­quests for com­ment.

An­gel Xiao, 23, who lives in the south­ern boom­town of Shen­zhen and does not own a credit card, said she bor­rowed 10,000 yuan last year from two on­line lenders, PPDAI and Flower Wal­let, to at­tend a jewellery de­sign class.

But after she lost her job as a tu­tor, she found her­self un­able to pay back the ini­tial loans. With in­ter­est pil­ing up, Xiao even­tu­ally took out a se­ries of new loans, with an av­er­age ma­tu­rity of 14 days, from more than 30 other lenders.

“I didn’t have money to re­pay loans com­ing due,” she said in an ex­change on WeChat, a mes­sag­ing ser­vice. “So I took out more loans. Ev­ery time when I didn’t have money, I used new loans to re­pay old loans. That’s how I got trapped deeper and deeper.” China Rapid Fi­nance Ltd, an on­line mi­cro-lender that raised $60 mil­lion in an April list­ing on the New York Stock Ex­change, de­fended its cash loan busi­ness.

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