China Daily Global Edition (USA)
Financial houses at wit’s end for green light
They (Chinese regulators) need time to study and observe the booming nascent sectors as well but, when the risks are exposed, they quickly move to tighten the screws.”
“A good shell company with a third-party payment license to sell,” blared a posting on Zhihu — the Chinese mainland’s question-and-answer community version of the US-based Quora site.
“It’ll be very expensive as such licenses are scarce. Only interested parties with a solid certificate of deposit need to inquire,” it warned.
But, by the time a China Daily reporter called the contact person named in the posting, a Beijing-based agent with the pseudonym Xiaoli claimed that the shell company holding the license, which authorizes nonbank financial institutions to run online payment operations on the mainland, had already been sold.
The agent, however, added that she still had information on two other companies with such licenses, and would only help potential buyers to seal the deal if they had a funding certificate of 750 million yuan ($113 million) — the current market price of shell companies with the license.
Potential buyers are nonetheless warned that the two companies mentioned are not “clean” as they had either incurred the wrath of the central bank, the People’s Bank of China (PBOC), or had been sued, reducing the chances of getting their licenses renewed every five years.
Despite the high risks involved in such transactions, many buyers, apparently, remain undeterred amid a red-hot market for the resale of financial enterprise licenses.
Mainland financial regulators have tightened the screws on the financial market as a risk-control measure by curbing or restricting the issuance of various financial house permits. The supply of such licenses has almost dried up as demand from burgeoning financial services companies, fueled by the proliferation of internet finance on the mainland in recent years, keeps rising. Market players eager to enter the market are very often frustrated by the long queues needed to get the green light, forcing them to turn to the secondary license-resale market, which operates under the pretext of facilitating mergers and acquisitions.
The mainland’s internet finance era hit a high in 2013 with a string of blockbuster launches, including those of Yu’ebao — the country’s biggest online payment platform — and its domestic rival WeChat Pay. The online payment trend built up the infrastructure for the creation of varied internet financial applications, such as P2P lending, crowdfunding, online investment fund sales and online insurance sales.
“These online investment platforms are changing the way consumers access financial products on the mainland. They are able to reach the critical masses quickly due to their broad appeal and accessibility,” explained Xue Hongyan, a senior analyst at JD Finance — the financial arm of leading mainland e-commerce company JD.
Conventional licenses for financial institutions, such as banks, insurance, trust, securities and future trading houses, have been unable to cope with the huge demand from internet finance and stay aligned with the industry’s development.
At the same time, new registration and a host of licenses have been introduced by mainland financial watchdogs. Thirdparty online payment, credit scoring, online insurances and the like have sprouted in recent years.
“Chinese regulators have been relatively tolerant. They need time to study and observe the booming nascent sectors as well but, when the risks are exposed, they quickly move to tighten the screws,” said Xue.
One of the most notorious scams that came to light was the Ponzi scheme run by Ezubao — then China’s largest P2P lender — in 2015 when some 900,000
Xue Hongyan,
JD Finance senior analyst at
the value of Gome’s acquisition of online payment system Easy Bonus Card
investors were ripped off to the tune of 50 billion yuan.
“Since 2015, the time needed for approving licenses for financial houses, especially in the internet financing sector, has been prolonged and, in some areas like third-party payment, new license issuances have stopped,” Xue added.
According to Xiaoli, the most expensive shell companies are unquestionably those with thirdparty licenses. Since 2011, the central bank has issued four batches of more than 270 thirdparty online payment licenses. Online payment platforms have mushroomed on the mainland in recent years, with the market dominated by just a handful of players.
According to market research firm Analysys, Alipay — the online payment creation of e-commerce titan Alibaba Holdings — commanded a 54-percent share of the mainland’s mobile transaction value in the first quarter of this year, while WeChat Pay took 40 percent, leaving the other players with online payment licenses in an awkward situation to continue the game.
On the other hand, flagship companies are eager to have their own online payment system for multiple reasons — saving transaction fees without having to pay for a third party, achieving a full business cycle, and obtaining valuable consumer data for better use.
The market has seen a continuous raft of acquisitions of companies holding third-party payment licenses. Domestic mobile phone producer Xiaomi acquired a controlling stake in Jiefu Ruitong last year, while leading home appliances retailer Gome acquired Easy Bonus Card with a record 0.72 billion yuan in June this year.
The abrupt suspension of new licenses has pushed prices for existing licenses from just several million yuan to hundreds of millions of yuan. Financial advisory companies which hire agents like Xiaoli to match buyers with shell companies have burgeoned in Beijing, Shanghai and Shenzhen on the back of the dearth in supply.
For each successful deal for an online payment license, the agent gets a commission ranging from 3 to 5 million yuan, Xiaoli told China Daily. Having been in the trade for more than a decade, she has seen the market grow from just a few players to “hundreds of thousands of such financial advisory companies in Beijing”.
“Last year had been a good year,” she said, but declined to reveal details of the deals or how big a fortune she has made so far. Business was still in good shape for many agents before the regulators cracked the whip.
Transferring and reselling financial licenses is explicitly banned by mainland financial regulators, so acquiring a company that already has a license is the sole legal path for any company wishing to obtain it.
The PBOC announced in June the fourth round of extending third-party payment licenses. Nine companies failed to have had their permits renewed, while four lost their licenses for having “transferred their licenses in disguise”, according to the central bank. A third-party online payment license has to be renewed every five years and, discounting the licenses repealed, there are an estimated 247 licenses in the market.
Zhu Ruixue, another agent based in Shenzhen, said his company had not been able to acquire similar shell companies. Many agents like him have been making a living by turning to private funds, insurance and micro-loan licenses.
A backlog of insurance-license applications has built up after China Insurance Regulatory Commission (CIRC) Chairman Xiang Junbo lost his job in April this year. He was criticized for giving leeway to insurers to invest their funds in risky assets.
According to Xiaoli, many of her clients had waited in vain for a year after filing their applications for insurance licenses. In despair, they turned to Plan B for acquiring one. The Insurance Association of China could not be reached for comment regarding how many insurance applications are in the queue for approval.
The market had a rude shock when the PBOC said last month the central bank and its regional branches would stop licensing new online micro-loan lenders, while offline brick-and-mortar lenders must be constrained to operating within their registered locations with immediate effect.
The market price of online micro-lender licenses skyrocketed from 30 million yuan to 50 million yuan overnight, Zhu revealed.
However, challenges remain. Even if a deal is closed, the purchaser may find regulators standing in their way in the last hurdle. Applications for registration with the Industrial and Commercial Administration Bureau is easy, Xiaoli said, but in the last procedure, filing records with relevant regulators, such as the China Securities Regulatory Commission, China Banking Regulatory Commission and CIRC before new companies can start business, could be problematic.
“There have been several cases in which regulators kept asking my clients to file supplementary materials, and have yet to file their records at this stage,” she said.
Xiaoli’s clients, who have paid a big sum, are distraught. Buyers who have resorted to the alternative plan have to consider the risk of not getting the license even if they have a shell company at hand.
“The acquiring and agency fees are not fully refundable. And, even for those who have failed to get their records filed in the end, they could only get a partial refund. There’s nothing we can do about it,” Xiaoli said.
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