China’s financial regulators have drafted rules that clamp down on a booming microlending market in the world’s second-largest economy, a move that could curb the profits of the country’s fintech giants and stem the flow of funds to small businesses. The publication of the consultation paper on Monday coincided with a meeting between Chinese financial regulators, led by the relatively conservative People’s Bank of China (PBOC), and top executives of Ant Group , China’s largest online provider of microfinance services. “This is a strong regulatory tightening signal,” Shujin Chen and Alfred He, equity analysts at brokerage Jefferies, said in a report for investors. The draft rules could dam liquidity flowing to parts of the economy that need it the most. China is recovering from the economic pain inflicted by coronavirus-related lockdowns this year, but small business owners and individuals are still struggling to obtain loans from traditional banks. While regulators are seeking to reduce debt in the financial system, the draft rules could also crimp microlenders’ profits by piling on compliance costs, slashing the size of individual loans and requiring online platforms to contribute a larger share of loans instead of relying on traditional lenders’ balance sheets, analysts said. To be sure, the regulators might still revise the rules. Smaller rivals might not be able to afford the higher compliance costs and could fall by the wayside. There were 7,227 microfinance companies in China with 902 billion yuan (US$135 billion) in loans outstanding as of September 30, according to PBOC data. Jack Ma , the Chinese billionaire who co-founded Ant and controls 50.5 per cent of its voting rights, said on October 24 that traditional lenders were run like “pawn shops”, as banks always demand collateral before lending. In future, he said, lending decisions should be decided by big data analysis. A core plank of Ant’s strategy is to earn fees by providing a digital platform for banks to reach small borrowers and more accurately price credit risk. It is due to make its trading debut in Shanghai and Hong Kong in the world’s biggest initial public offering, after winning approval from regulators last month. It has flagged changing regulations as a risk for prospective shareholders. Yi Gang, the PBOC’s governor, said during a panel discussion at a Hong Kong financial technology summit on Monday that innovation by Big Tech companies had made microloans possible in China’s hinterlands. “That is a tremendous improvement,” he said. Yi also said that the PBOC had noticed commercial banks were using Big Tech companies’ services to find customers and depended on them for risk management. The regulators met Ma, Ant’s executive chairman Eric Jing and chief executive Simon Hu on Monday, according to the securities regulator. The meeting also included representatives from the China Banking and Insurance Regulatory Commission (CBIRC), the China Securities Regulatory Commission and the State Administration of Foreign Exchange, the currency regulator. They discussed the health and stability of the financial sector, and Ant will implement the meeting’s opinions in-depth, according to a company spokesperson. Ant’s management likens China’s banks to the arteries of the economy, and Ant as the capillaries that send funds to its extremities – small businesses and individuals. The company’s consumer and small businesses lending division generated 39.4 per cent of its revenue in the six months ended June 30. Ant originates loans, 98 per cent of which are then underwritten by financial institutions or securitised. As of June 30, it was working with about 100 banks. Loans extended by banks through online platforms hit 1.43 trillion yuan on June 30, the PBOC said, equal to 22 per cent of personal consumption loans excluding mortgages and credit card loans. The draft rules said large online microlending companies will be supervised by central regulators, including the PBOC and CBIRC, instead of local bureaus, suggesting more frequent reporting and monitoring of lending, analysts said. The rules also ban regional banks from lending outside their provinces through online platforms. Such banks are likely to be the biggest users of online microlending companies and have been keen to use digital platforms to find borrowers outside their locale, analysts said. The draft rules also cap the size of loans at 300,000 yuan for each person and 1 million yuan for businesses. This rule might have less of an impact on Ant’s businesses Huabei and Jiebei, which make small loans. Smaller rivals that make larger loans, such as New York-listed Yiren Digital, might be hit harder. Yiren Digital did not respond immediately to a request for comment. Lufax, Ant’s smaller rival, started trading in New York on Friday. Loans funded by microloan subsidiaries accounted for less than 1 per cent of the total loans Lufax facilitated during the nine months ended September 30. All microloans funded in this period were funded without any joint lending or loan facilitation funding partners. It said it did not expect the draft rules to have any material impact on its business operations. The rules also require online platforms to contribute at least 30 per cent of loans, up from 1 per cent to 20 per cent, and the loans cannot be used to invest in financial markets, property or for repaying mortgages. The online platforms will have at least one year to comply with the new rules. Ma said Beijing’s emphasis on “preventing systemic financial risks” was wrong-headed. “Innovation always comes with a risk. There will be no risk-free innovation … the biggest risk is that you try to minimise the risk to zero,” he said. A one-third share in Ant Group is held by South China Morning Post parent Alibaba Group Holding.