China may impose licenses for online consumer lenders, dousing the explosive growth in fintech

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China is considering the tighter regulation of online consumer lending, a move that could hinder the fast-growing industry, which provides the country’s unsophisticated borrowers with billions of yuan in credit.

The discussion among regulators involves the issuing of licences to eligible fintech groups, and taking a harder line on the charging of annualised interest above the legal maximum limit of 36 per cent, sources close to the matter told the South China Morning Post.

An entry threshold should be in place for all financial service providers, said Huang Yiping, director of the Digital Finance Research Centre at Peking University and member of China’s central bank monetary policy committee, after a recent visit to fintech firms in the US and comparative studies between the countries.

“Although regulation is no guarantee for [a] risk-free [industry], huge risk will definitely loom where there is none at all, as we have already seen over the past few years,” Huang said during a presentation on Saturday. “As the financial sector itself is built on asymmetry of information, risks once formed up are easily conductive.”

Huang’s remarks echoed those of the People’s Bank of China governor, Zhou Xiaochuan, who called for “both pre-emptive measures and reactive solutions” to curb systemic financial risks in an article published over the weekend, to help the public better understand last month’s party congress report.

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Platforms that provide micro loans have mushroomed in China since 2009, a year after the subprime lending blowout strangled the US economy and led to a worldwide financial crisis. While Chinese regulators, concerned about non-creditworthy borrowers, cranked up scrutiny on consumer loans, this gave online lenders a niche to build their market.

According to the National Internet Finance Association of China, loans borrowed through online lenders stood at 803.4 billion yuan (US$121.08 billion) at the end of last year. Although this amount accounted for 0.5 per cent of total social financing, a gauge used in China to measure overall credit growth, the number of borrowers and lenders involved increased rapidly by about 36 million in 2016.

“The message is clear – that all financial service providers, regardless of their form, shall be subject to supervision and regulation,” Lu Shuchun, secretary general of the association, said.

Improvements have been made as the internet finance sector consolidates, Lu said. The average loan duration among internet lenders increased by 1.7 months to 8.4 months last year, while interest decreased by 1.8 percentage points to an average of 9.3 per cent.

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Lu said these platforms should remain “in awe of regulatory demand” and live up to the market expectations for digital finance.

Concerns over tighter scrutiny have led to sharp swings for some recently listed online lenders, such as Qudian, which dipped below its offering price just weeks after its flotation. According to the company, its annualised interest rate on 59.5 per cent of the loans it gave out last year surpassed the 36 per cent limit.

Another online consumer lender, China Rapid Finance, slumped by 7.1 per cent last week.

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