China’s debt crackdown hits cash loan providers

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BEIJING (Reuters) – Executives of Chinese companies that specialize in offering small, easy-to-obtain loans to consumers have become a fixture on Wall Street this year.

The Qudian app logo can be seen on a smartphone in an illustrative photo taken in Beijing, China on December 1, 2017. REUTERS / Jason Lee / Illustration

Run by companies such as Qudian Inc QD.N and Groupe PPDAI Inc PPDF.N, Chinese micro-lenders raised $ 1.2 billion with booming listings in the United States, capitalizing on a consumer borrowing boom in China with little access to traditional banks.

However, the fortunes – and stock prices – of micro-lenders collapsed last week as Beijing clamped down on risks in the financial system, focusing on the rapidly growing and loosely regulated market for non-cash “cash loans”. guaranteed.

Chinese financial regulators on Friday introduced new measures to restrict the industry, which is estimated at 1,000 billion yuan ($ 151.5 billion).

China has long been known as a nation of savers, but consumers are quickly running into debt on non-bank online platforms. The number of borrowers taking cash loans from micro-lenders is growing at an unprecedented rate, according to loan companies and the government.

For borrowers, easy loans can be a risky proposition, especially if they are late in paying. Loans are generally in the order of 1,000 yuan; interest is typically around 36% per annum, and penalty charges and compound interest can add up quickly, according to borrowers.

The number of recurring borrowers is increasing, which could signal financial strains on borrowers, analysts said. Companies, however, say repeat loans are just a sign of how attractive their platforms are.

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 the booming southern city of Shenzhen and does not have a credit card, said she borrowed 10,000 yuan last year from two online lenders, PPDAI and Flower. Wallet, to attend a jewelry design course.

But after losing her job as a tutor, she found herself unable to repay the initial loans. With interest accumulating, Xiao eventually took out a series of new loans, with an average maturity of 14 days, from more than 30 other lenders.

“I had no money to pay off the maturing loans,” she said in an exchange on WeChat, a messaging service. “So I took out more loans. Whenever I didn’t have the money, I used new loans to pay off the old ones. This is how I got trapped deeper and deeper. ” China Rapid Finance Ltd XRF.N, an online micro-lender that raised $ 60 million on an April listing on the New York Stock Exchange, has defended its cash lending business.

In a statement, he said his target clients have little or no history with the Chinese credit bureau, but that they “are senior and near-privileged borrowers,” and that he does not grant credit. new loans only to borrowers who have fully repaid all previous loans. granted by the company. He also said the rates charged are affordable.

In its third quarter earnings report, China Rapid Finance’s recurring borrower rate was 75%.

GROWING MARKET

Online consumer lending in China, of which cash lending accounts for a significant share, eclipses similar activity in the rest of the world combined, accounting for more than 85% of all such activity globally last year, according to a recent Cambridge Center for Alternative report. Finance. The microcredit boom comes as lenders look to capitalize on rising incomes in a country where credit card penetration remains at around a third of the population, according to central bank data, which says about half a billion consumers don’t have a credit score. And the online money lending industry is expected to reach 2.3 trillion yuan by 2020, according to research firm iResearch.

China Rapid Finance announced in November a 514% 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, increased more than 10 times year-on-year to 1.98 billion yuan in the second quarter, he said. indicated. Qudian recorded a 695% increase in net profit in the first six months of this year, it said in its listing prospectus.

Qudian and PPDAI declined to comment.

In addition to companies already listed on the US markets, another Chinese lender, LexinFintech Holdings Ltd LX.O, filed for Nasdaq listing in mid-November in hopes of raising $ 500 million.

LexinFintech said in a statement Friday that it “continues to work to achieve the goals outlined” in its filing.

LOW INCOME HOUSEHOLDS

The explosion of online lending to those without access to traditional banks has raised concerns about the risks of default. China’s household debt stock was 45.5 percent of gross domestic product at the end of the first quarter, according to the Bank for International Settlements, up from 27.9 percent five years ago. (tmsnrt.rs/2iuXWTT)

But that total doesn’t include most online consumer loans, analysts said.

“It is quite fair to say that household debt is much higher than you might think,” said Professor Christopher Balding of Peking University HSBC School of Business in Shenzhen. He estimated that household debt could account for more than 100 percent of household income in China.

Nearly 40% of Chinese households are low on savings, which is even higher than the U.S. rate, which means their cash reserve to pay off debt is limited, said Lu Xiaomeng, a researcher at the Survey and Research Center for China Household. Finance from Southwestern University of Finance and Economics.

Much of the cash lending industry is “supply driven,” said Johnson Zhang, chief financial officer of Chinese peer-to-peer lender Hexindai Inc. HX.O. “It is questionable whether there is real demand and whether borrowers will be able to repay them,” he said, stressing that his company only accepts borrowers with credit cards.

Reporting by Shu Zhang and Elias Glenn; Additional reporting by Beijing Newsroom and Andrew Galbraith in SHANGHAI; Editing by Philip McClellan and Eric Meijer


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