China’s central bank orders crackdown on online lenders to curb runaway credit
Effective immediately, no new licences can be issued for online platforms, while bricks-and-mortar lenders can only operate within their registered locations, according to the central bank’s November 21 instructions.
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.
“Payday loan companies are just one type of the fast-developing small-loan companies, a loosely regulated market where some players are running around with online lending licences issued by provincial level authorities while some operate without even an online business licence,” he said. “While several big payday loan companies have already raised billions of dollars of capital at home and in the US, it is worth watching whether the central bank will introduce further restrictions on the interest rates they can charge, or push them to meet stricter requirements.”
The central bank’s action is also in line with intentions to strengthen regulation in China’s financial sector, particularly in fintech, according to Lillian Li, vice-president and senior analyst, credit strategy and standards, at Moody’s.
“The suspension would deter new players, and drive up the price of existing licences. Existing players are likely to be impacted on their business in the short term as they would follow these regulations and strengthen their scrutiny of the partners on their platforms,” said Li.
Li believed the halt in issuing new licences would only have a relatively small impact on overall credit demand because online lending currently makes up a marginal share of the total credit market. “But in the long term, existing players are likely to benefit from these regulations, which intend to improve transparency and level the playing field,” Li said.
Chinese lending companies had already caught wind of the central bank’s impending restrictions, with the stock prices of US-listed firms tumbling on Tuesday.
Qudian Inc, whose stock price has fallen below its US$900 million initial public offering level barely a month ago, tumbled as much as 20 per cent in New York. PPDAI Group Inc, a Shanghai-based competitor, also fell below its IPO price, plunging by 14 per cent to US$10.80.
Qudian, backed by Alibaba Group Holding’s affiliate Ant Financial, may face a class-action suit following the drastic decline in its stock value, according to New York law firm Faruqi & Faruqi, which announced it is conducting investigations of potential claims against the lender. Qudian officials were unavailable for comment.
Alibaba owns the South China Morning Post.