China's debt crackdown hits cash loan firms (updated)
01/12/2017 08:58
(Updates with comment from LexinFintech)
By Shu Zhang and Elias Glenn
BEIJING, Dec 1 (Reuters) - Executives from Chinese companies
specialising in offering consumers small, easy-to-get loans
became something of a fixture on Wall Street this year.
Led by companies like Qudian Inc QD.N and PPDAI Group Inc
PPDF.N , the Chinese micro-lenders raised $1.2 billion with
splashy U.S. listings, cashing in on a boom in borrowing by
consumers in China with little access to traditional banks.
However, the fortunes - and share prices - of the
micro-lenders have slumped in the past week as Beijing clamped
down on risks in the financial system, zeroing in on the
fast-growing and loosely-regulated market for unsecured "cash
loans".
A notice last week announcing the suspension of approvals
for new micro-lenders and restrictions on business across
regions highlighted the growing risks Beijing sees in the
industry, estimated to be worth 1 trillion yuan ($151.5
billion), according to 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 numbers of those taking out cash loans from
the lenders is growing at an unprecedented rate, according to
the companies and the government.
For borrowers, the easy loans can be a risky proposition -
especially if they fall behind on payments. The loans are
usually in the range of 1,000 yuan; interest is typically about
36 percent annually, and penalty charges and compound interest
can quickly add up, according to borrowers.
The number of repeat borrowers is rising, which could signal
financial stress on borrowers, analysts say. The companies,
however, say the repeat lending is just a 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 the southern boomtown of
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 jewellery design class.
But after she lost her job as a tutor, she found herself
unable to pay back the initial loans. With interest piling up,
Xiao eventually took out a series of new loans, with an average
maturity of 14 days, from more than 30 other lenders.
"I didn't have money to repay loans coming due," she said in
an exchange on WeChat, a messaging service. "So I took out more
loans. Every time when I didn't have money, I used new loans to
repay old loans. That's how I got trapped deeper and deeper."
China Rapid Finance Ltd XRF.N , an online micro-lender that
raised $60 million in an April listing on the New York Stock
Exchange, defended its cash loan business.
In a statement, it said that its target customers have
little or no history with China's credit bureau, but that they
"are prime and near-prime borrowers", and that the rates the
company charges are affordable.
BOOMING MARKET
Online consumer lending in China, of which cash loans are a
significant portion, dwarfs similar activity in the rest of the
world combined, accounting for over 85 percent of all such
activity globally last year, according to a recent report by the
Cambridge Centre for Alternative Finance.
The boom in micro-lending comes as lenders seek to cash in
on rising incomes in a country where credit card penetration
remains at about one-third of the population, according to data
from the central bank, which says about half a billion consumers
don't have a credit score.
And the online cash loan sector is projected to reach 2.3
trillion yuan by 2020, according to the research firm iResearch.
China Rapid Finance in November reported a 514 percent
year-on-year increase in short-term consumer lending in the
third quarter to $908 million. PPDAI'S "handy cash loans", with
maturities of one to six weeks, increased more than 10 fold
year-on-year to 1.98 billion yuan in the second quarter, it
said. Qudian recorded a 695 percent increase in net income for
the first six months this year, it said in its listing
prospectus.
Qudian and PPDAI declined to comment.
In addition to the companies that have already listed on
U.S. markets, another Chinese lender, LexinFintech Holdings Ltd
LX.O , filed for a Nasdaq listing in mid-November hoping to
raise $500 million. urn:newsml:reuters.com:*:nL3N1NM3BB
LexinFintech said Friday in a statement that it "continues
to work toward those objectives as described" in its filing.
LOW-INCOME HOUSEHOLDS
The explosion in online lending to those without access to
traditional banks has raised concerns about the risks of
default.
Outstanding household debt in China equalled 45.5 percent of
gross domestic product at the end of the first quarter,
according to the Bank of International Settlements, compared to
27.9 percent five years ago.
But that total doesn't include most online consumer lending,
analysts say.
"It is entirely fair to say household debt is much higher
than is understood," Professor Christopher Balding at the Peking
University HSBC School of Business in Shenzhen said. He
estimated that household debt could be over 100 percent of
household income in China.
And nearly 40 percent of Chinese households lack savings,
higher than even the U.S. rate, meaning their cash buffer to pay
off debt is limited, said Lu Xiaomeng, a researcher at the
Survey and Research Center for China Household Finance at the
Southwestern University of Finance and Economics.
The cash loan industry is largely "supply-driven", said
Johnson Zhang, chief financial officer at the Chinese
peer-to-peer lender Hexindai Inc HX.O . "Whether there is real
demand and whether borrowers will be able to pay them back are
questionable," he said, emphasizing that his company only
accepted borrowers with credit cards.
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China household debt http://reut.rs/2AJfHqk
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(Reporting by Shu Zhang and Elias Glenn; Additional reporting
by Beijing newsroom; Editing by Philip McClellan)
((Elias.Glenn@thomsonreuters.com; +86 138 1600 5903; Reuters
Messaging: elias.glenn@thomsonreuters.com))
Keywords: CHINA ECONOMY/LOANS