Fitch considers downgrading Baidu on growing shadow banking business

PUBLISHED : Wednesday, 31 May, 2017, 11:19pm
UPDATED : Thursday, 01 June, 2017, 3:09pm

Credit rating agency Fitch Ratings is considering lowering Baidu’s “A” rating, on the belief that the company’s rapid growth in financial services activities has increased overall business risk.

Baidu has rapidly expanded its Financial Services Group, which sells wealth management products (WMPs) and operates a micro-lending business, is part of the growing shadow banking business in China. A rising number of investors in China are putting their money into shadow banking products such as WMPs due to a rise in credit and a dearth of investment options in the country.

Fitch stated that Baidu’s WMPs could pose a reputational risk if any of the products default or fail to meet target returns.

“WMPs have become an alternative form of financing for projects or investments that would not qualify for bank loans. A large exposure to WMPs may make Baidu vulnerable to asset-quality shocks, especially as loss events rise,” Fitch said.

Baidu’s Financial Services Group assets have more than doubled from 12 billion yuan (US$1.75 billion) at the end of 2016 to 25 billion yuan by the end of March this year.

The company is also boosting spending on digital content for its video streaming and news aggregation services, as it competes with rivals Alibaba and Tencent for a slice of the digital entertainment market. Its internet search business has suffered after a medical advertising scandal last year resulted in the death of a cancer patient, resulting in government restrictions introduced to curb dubious medical advertising on search engines.

Baidu’s credit rating currently falls behind that of Alibaba and Tencent’s “A+” rating.

Baidu’s American depositary receipts were down 1.6 per cent at US$186.72 in mid-session trade in New York on Wednesday.