China clamps down on online micro lending, causing US-listed shares to plunge
Beijing — China took steps to rein in the rapidly growing and lightly regulated market for online micro-lenders in the government’s latest crackdown on internet finance, sending shares of US-listed Chinese financial firms into a tailspin.
A government body issued a notice to provincial governments on Tuesday, urging them to suspend approval for setting up new internet micro-lenders, sources who had seen the notice told Reuters. The multi-department body, tasked by the central government to rein in risks in the internet finance sector, also told local regulators to restrict granting of new approvals for micro-loan firms to conduct lending across regions, said the sources.
Beijing started a crackdown on the internet finance sector in 2016, issuing guidelines and rules to regulate online financial activity following a spate of scandals and frauds. The clean-up has led to the creation of a top-level body comprising government entities that include the central bank and the banking regulator.
The crackdown on micro-lenders comes as Chinese authorities warn about rising household debt, which includes mortgages and consumer loans. Unsecured consumer lending via online platforms more than tripled in 2016 to almost $140bn, according to a report by the Cambridge Centre for Alternative Finance.
On Tuesday, shares in Chinese online lender Qudian sank nearly 20% on Nasdaq, before recovering ground to end 3.8% lower at $19.31. Qudian, backed by Alibaba affiliate Ant Financial, became profitable in 2016. It operates a website that allows college students and white-collar workers to buy consumer electronics in monthly instalments.
The firm went public at $24 a share, raising about $900m in an initial public offering (IPO), driven by robust US investor demand for fast-growing Chinese companies.
On Tuesday, shares of China Commercial Credit ended down 8.8% and PPDAI Group slumped 14%. Jianpu Technology finished 10.8% lower. Shares of China Rapid Finance, a peer-to-peer platform and a loan provider, fell before closing 3.3% higher.
There was no apparent reaction in Chinese mainland stocks, which were broadly up on Wednesday’s morning trade, led by the finance sector.
Companies providing small loans, especially on the internet, have expanded rapidly in the past year, partly due to loose government rules. Such firms meet demand for credit from individuals who have been shunned by Chinese banks, which typically prefer big corporate clients.
Loan amounts span from a few hundred yuan to tens of thousands, with borrowers typically without steady incomes or any credit history. Interest rates on these small loans can be more than 35% a year, some even higher, and are not often appreciated by individuals who are drawn to the easy terms and conditions.
Some borrowers also take loans from one lender to refinance loans from other credit providers, causing a spike in their debts. Local media have also reported cases of oppressive and sometimes violent loan-collection methods in a sector that has thrived under little supervision.
Tuesday’s move came just days after LexinFintech filed a $500 million IPO with the US securities and exchange commission, the latest in a series of offerings from the sector.