HONG KONG, Dec 15 — China’s whac-a-mole approach to risk — hit it everywhere it pops up — is set to hand control of the surging US$121 billion technology-driven lending market to a small group of leaders such as Lufax Holding and the finance affiliate of Jack Ma’s Alibaba Group Holding Ltd.
Extending a crackdown on online micro-lenders, authorities this month enforced a cap on interest rates and said illegal operators would be closed. The regulation is likely to purge many of the country’s thousands of fintech lenders, leaving Lufax and other top 10 players such as Yirendai Ltd. and Qudian Inc with more than half the market, according to Macquarie Group Ltd.
The survivors are in for a bonanza in coming years: Macquarie estimates credit extended by China’s fintech firms will jump more than seven-fold by 2022 to 6.2 trillion yuan (RM3.8 trillion) to pay for things like luxury and household goods or training and education. About half that market is micro-lending — typically small, short-term loans with high interest rates, Macquarie says.
The latest purge, following last year’s cleanout of peer-to-peer lenders, is a boon to China’s new generation of lending giants at a time of surging demand for consumer credit. That is driven by rising wealth and spending power, and the ease of accessing money online following years of neglect by banks of household and small business lending.
Alibaba’s Ant Financial Services Group and Lufax, backed by Ping An Insurance (Group) Co., will benefit as borrowers turn to a shrinking group of survivors to get credit, according to Terry Sun, an analyst at RHB Securities Hong Kong Ltd.
“I think the top tier of these borrowers migrate to the more-established players,” said James Lloyd, the Hong Kong-based head of fintech in the Asia-Pacific region at EY. “Perhaps the lower tiers go back off the grid entirely.”
The fintech lenders most likely to succeed under the new regime are those that can successfully crunch personal data to assess a customer’s creditworthiness, analysts say. Some smaller firms have drawn regulatory scrutiny after dishing out loans too freely and then relying on underhand techniques such as violence or intimidation to get their money back.
Already, market power is concentrated at the top. China’s 10 biggest fintech companies account for 36 percent of all loans, said Dexter Hsu, a Taipeh-based Macquarie analyst. Tighter regulation could erode China’s more than 2,000 online micro-lenders and so-called P2P platforms, which directly match borrowers with investors, to less than 200, he said.
“Outside the top 10, they could be wiped out,” Hsu said.
The ceiling of 36 percent imposed on interest rates and fees by Chinese regulators would hit short-term lenders the hardest, said Hsu. Some of them are charging 200 per cent interest on loans lasting as little as two weeks, he said.
The crackdown on high-interest consumer debt may also touch some of the 500-plus online P2P platforms that offer cash loans, based on a tally of lenders in a November report by the National Committee of Experts on the Internet Financial Security Technology.
P2P firms were already subject to a cleanout in 2016 after authorities unearthed a Ponzi scheme that may have defrauded close to 1 million people out of US$7.6 billion (RM31 billion). P2P loans are funded by individuals, while other fintech lenders can tap a variety of funds from sources such as banks and trusts.
“Eventually, there will be fewer and fewer competitors,” said Oliver Rui, a professor at the China Europe International Business School in Shanghai. The outlook is most promising for well-funded, data-rich platforms like Alipay, he added.
Permission to borrow
The experience of Sun Yueqin, a 25-year-old student from Zhengzhou, illustrates the way some fintech lenders assess their borrowers. Sun says she was authorised to borrow as much as 35,000 yuan based on Alipay’s analysis of her online spending. In March, she borrowed 1,000 yuan on Alipay’s Jiebei service to buy skincare products.
“I might borrow again if I need to,” said Sun, adding that she hasn’t missed a repayment.
Ant Financial uses artificial intelligence and big data analysis as part of a “rigorous risk control system” that keeps the delinquency rate at its Huabei and Jiebei consumer-loan businesses to around 1 per cent, according to a statement from the company.
The proportion of non-performing loans at Chinese banks at the end of 2016 was 1.9 per cent. Lufax had 269.2 billion yuan of loans under management as of Sept 30, up 141 per cent from a year earlier.
Ant Financial said it couldn’t comment on the impact of regulation, and representatives for Lufax, Qudian and Yirendai didn’t reply to emails seeking comment. — Bloomberg