BEIJING, Dec. 1 (Reuters) – Executives at Chinese companies who specialize in offering consumers small, easy-to-get loans became a fixture on Wall Street this year.
Led by companies like Qudian Inc and PPDAI Group Inc, Chinese microlenders raised $ 1.2 billion with eye-catching US quotes, taking advantage of the consumer loan boom in China with little access to traditional banks.
However, the fortunes and share prices of microlenders plummeted last week as Beijing cracked down on financial system risks and focused on the fast-growing and loosely regulated market for non-cash loans. guaranteed.
A notice last week announcing the suspension of approvals for new microlenders and restrictions on business in all regions highlighted the growing risks that Beijing sees in the industry, estimated at one trillion yuan ($ 151.5 billion), according to the state media.
China has long been known as a nation of savers, but consumers are rapidly embracing debt from non-bank online platforms. And the number of people borrowing cash from lenders is growing at an unprecedented rate, according to businesses and the government.
For borrowers, easy loans can be a risky proposition, especially if they fall behind on payments. Loans are usually around 1,000 yuan; Interest is typically around 36 percent per year, and penalty charges and compound interest can add up quickly, depending on borrowers.
The number of repeat borrowers is increasing, which could indicate financial stress on borrowers, analysts say. However, companies say that repeat loans are just one sign of the attractiveness of their platforms. Sources close to the central bank say more unspecified measures aimed at restricting the industry are on the way.
The People’s Bank of China and the China Banking Regulatory Commission did not respond to faxed requests for comment.
Angel Xiao, 23, who lives in southern Shenzhen and does not own a credit card, said she borrowed 10,000 yuan last year from two online lenders, PPDAI and Flower Wallet, to attend a design class at jewels.
But after losing her tutoring job, she found herself unable to repay the initial loans. With the interest accrued, Xiao finally obtained a series of new loans, with an average maturity of 14 days, from more than 30 other lenders.
“I had no money to pay the overdue loans,” he said in an exchange on WeChat, a messaging service. “So I asked for more loans. Whenever he had no money, he used new loans to pay off old loans. This is how I got caught deeper and deeper. “
China Rapid Finance Ltd, an online micro-lender that raised $ 60 million in an April listing on the New York Stock Exchange, defended its cash lending business.
In a statement, it said its target clients have little or no history with China’s credit bureau, but that “they are prime and quasi-prime borrowers” and that the rates charged by the company are affordable.
MARKET IN BOOM
Online consumer loans in China, of which cash loans are a significant part, overshadow similar activity in the rest of the world combined, accounting for more than 85 percent of all that activity globally last year, according to a recent report from the Cambridge Center for Alternatives. Finance.
The microcredit boom comes as lenders seek to capitalize on rising incomes in a country where credit card penetration remains at about a third of the population, according to data from the central bank, which says around 500 million consumers do not. I don’t have a credit score.
And the online cash loan sector is projected to reach 2.3 trillion yuan by 2020, according to research firm iResearch.
China Rapid Finance in November reported a 514 percent year-on-year increase in short-term consumer loans in the third quarter to $ 908 million. PPDAI’s “handy cash loans”, with maturities of one to six weeks, rose more than tenfold year-on-year to 1.98 billion yuan in the second quarter, he said. Qudian posted a 695 percent increase in net income for the first six months of this year, it said in its listing prospectus.
Qudian and PPDAI declined to comment.
In addition to the companies that have already been listed on the US markets, another Chinese lender, LexinFintech Holdings Ltd, submitted an application to list on Nasdaq in mid-November in hopes of raising $ 500 million.
LexinFintech did not respond to an emailed request for comment.
LOW INCOME HOUSEHOLDS
The explosion of online lending to those without access to traditional banks has raised concerns about default risks. Outstanding household debt in China was equal to 45.5 percent of gross domestic product at the end of the first quarter, according to the Bank for International Settlements, compared with 27.9 percent five years ago.
But that total doesn’t include most online consumer loans, analysts say.
“It is totally fair to say that household debt is much higher than is believed,” said Professor Christopher Balding of the HSBC School of Business at Peking University in Shenzhen. He estimated that household debt could represent more than 100 percent of household income in China.
And nearly 40 percent of Chinese households lack savings, even higher than the US rate, meaning their cash reserve to pay off debt is limited, said Lu Xiaomeng, a researcher at the Survey Center. and Research on China Home Finance from Southwest Finance University. and Economy.
The cash lending industry is largely “supply-driven,” said Johnson Zhang, chief financial officer of Chinese peer-to-peer lender Hexindai Inc. “It is questionable whether there is real demand and whether borrowers will be able to repay it,” he said, emphasizing that his company only accepted borrowers with credit cards.
Reporting by Shu Zhang and Elias Glenn; Additional reports from the Beijing newsroom; Editing by Philip McClellan