Update | China’s central bank orders crackdown on online lenders to curb runaway credit

China’s central bank has issued its harshest set of restrictions yet to rein in the country’s online microlending businesses, putting on a tight leash an industry that was feeding off young borrowers living beyond their means.

Effective immediately, the People’s Bank of China and its regional branches must stop licensing any new online microloan lenders, while offline bricks-and-mortar lenders must be constrained to operating within their registered locations, according to the order, a copy of which was obtained by the South China Morning Post.

“In recent years, some regional authorities have approved the set-up of online small lending companies, or allowed small-loan companies to run online lending services, while the consumer lending business provided by some institutions contained relatively big risks,” the bank said in its November 21 instruction.

The sprawling online microlending business has fuelled a 1.49 trillion yuan (US$224.7 billion) surge in outstanding short-term consumer loans in the first nine months of 2017, almost double the 830 billion yuan growth in the whole of 2016, according to central bank data.

China’s economy is awash with billions of yuan of cheap capital, as hundreds of microloan lenders have sprouted up in recent years in place of traditional state-owned banks to provide funding and capital to everything from start-ups and entrepreneurial ventures to personal borrowings.

As of the end of June, there were an estimated 200 online microloan lenders licensed in China.

The central bank made the move after a number of loan collection agents were exposed as engaging in aggressive tactics to hound young borrowers, bringing into question the predatory nature of some lenders, said the Shenzhen Internet Financial Association’s secretary general, Zhang Guodong. Payday loans, or unsecured, short-term cash advances, are particularly egregious, he said.