China gets tough with online microlenders

Loose regulation has enabled firms offering small loans to flourish

CHINA took steps to rein-in the rapidly growing and lightly regulated market for online microlenders in its government’s latest crackdown on internet finance, sending shares of US-listed Chinese financial firms into a tailspin.

A top-level Chinese government body issued an urgent notice on Tuesday to provincial governments, urging them to suspend regulatory approval for the setting up of new internet micro-lenders, sources who had seen the notice told Reuters.

The multidepartment body, tasked by the central government to rein-in risks in the internet finance sector, also told local regulators to restrict granting new approvals for micro-loan firms to conduct lending across regions, according to the sources.

The information office of the State Council, or cabinet, referred Reuters to the People’s Bank of China (PBOC) and other regulators when asked to comment. The PBOC has yet to respond to a request for comment.

Beijing started a crack down on the internet finance sector last year, issuing guidelines and rules to regulate online financial activity following a spate of scandals, frauds and high-profile peer-to-peer (P2P) failures.

Top-level body

The clean-up has led to the creation of a top-level body comprising government entities that include the central bank and the banking regulator.

The crackdown on micro-lenders comes as authorities warn about rising household debt, which includes mortgages and consumer loans.

Unsecured consumer lending via Chinese online platforms more than tripled last year to almost $140 billion (R1.94 trillion), according to a recent report by the Cambridge Centre for Alternative Finance.

On Tuesday, shares in Chinese online lender Qudian sank nearly 20 percent on the Nasdaq, before recovering some ground to end 3.8 percent lower at $19.31.

Qudian, backed by Alibaba affiliate Ant Financia, operates a website that allows college students and young white-collar workers to buy laptops, smartphones and other consumer electronics in monthly instalments.

Public offering

The company went public at $24 per share, raising about $900 million in an initial public offering that priced above expectations, driven by robust US investor demand for fast-growing Chinese companies.

On Tuesday, shares of China Commercial Credit ended down 8.8 percent and PPDAI Group slumped 14 percent. Jianpu Technology, which also debuted this month, finished 10.8 percent lower.

Shares of China Rapid Finance, a P2P platform and a loan provider, fell before closing 3.3 percent higher.

There was no apparent reaction in Chinese mainland stocks, which were broadly up on yesterday morning’s trade led by the finance sector.

Companies providing small loans, particularly on the internet, have expanded rapidly in the past year, partly because of loose government rules. Such firms meet demand for credit from individuals who have been shunned by Chinese banks, which typically prefer big corporate clients.

Loan amounts span from a few hundred yuan to tens of thousands, with borrowers typically without steady incomes or any credit history. The interest rates on these small loans can be more than 35 percent a year, some even higher, and are not often appreciated by individuals who are drawn to the easy terms and conditions.

Some borrowers also take loans from one lender to refinance loans from other credit providers, causing a spike in their debts. Local media have reported cases of oppressive and sometimes violent loan-collection methods. – Reuters