Overdue Diligence

Ant Group announced that Huabei is adjusting borrowing limits for younger users to encourage better spending habits. The move was interpreted by some analysts as a response to Chinese authorities’ tightening risk controls on internet finance, as online lending covers a much wider group of users compared with traditional financial institutions and risks are greater if supervision fails to catch up. 　

A report on consumer financial companies by the China Banking Association in August 2020 shows that young people constitute their main client demographic. In some companies, nine of whom provide tailored services for the young, the number of users in their 20s and 30s accounted for over 90 percent of their clients. But this deep association has made consumer lending a byword for overspending as problems mount, with younger borrowers increasingly becoming trapped in debt. The pervasive presence of loan products have also led to other social issues such as predatory campus loans targeting college students. 　

“Unbridled consumption is not only a problem for the young. It should not be over-interpreted, nor should we deny consumer loans because of it,” said Wang Hongling, a research fellow with the Institute for Chinese Economic Practice and Thinking (ICEPT) at Tsinghua University. However, Wang urged authorities to close loopholes to avoid systemic risks that will have far-reaching effects. 　

Ant Group’s prospectus shows that its loan products, including Huabei and Jiebei, provide crucial revenue streams, accounting for nearly 40 percent of total revenue in the first six months of 2020. By the end of June 2020, it boasted over 1.7 trillion yuan (US$263b) in outstanding consumer loans. Consumer lending expanded rapidly in China in the past several years. A report published by ICEPT at Tsinghua University shows that consumer credit rose from 679.8 billion yuan (US$105b) in October 2018 to 8.45 trillion yuan (US$1.3t) in January 2010. 　

The first consumer finance companies were set up in 2010 to provide more flexible loans to supplement banks and boost domestic demand. There are now at least 30 such companies. Four years later, online consumer lending took off as Chinese authorities encouraged internet finance. In February 2014, JD started JD Baitiao, China’s first internet-based consumer loan product, underpinned by its ecommerce platform. Before long, Ant Group, then called Ant Financial, launched its loan product Huabei. At the same time, lending platforms focused on small loans of 200,000 yuan (US$30,960) or less and adapted internet technology to attract clients, analyze consumption and transaction data and assess risk, streamlining the entire loan process. Without limits on consumption scenarios, these platforms mainly offer riskier cash loans. 　

In March 2016, the China Banking and Insurance Regulatory Commission (CBIRC) and the People’s Bank of China, the central bank, released a guideline supporting finance in new consumption fields and encouraged exploring new consumer loan products and online borrowing. The online consumer lending market expanded rapidly, with internet giants hopping on the bandwagon. The surging market is shared not only by traditional commercial banks, consumer finance companies and internet banks, but also e-commerce platforms, internet companies, installment payment platforms and online lenders. The scope has extended from retail to housing, education, home renovations and more. 　

But consumer lending is also blamed for enabling excessive consumption, particularly among students without stable incomes. Consumer loans that demand neither mortgages nor guarantees have left young people, who often have irrational spending habits and are unable to repay, drowning in debt. The CBIRC also warned consumers in December of the hidden risks or even traps behind the excessive promotion of borrowing. 　

“Young people who seldom feel stress in life tend to overspend, and all kinds of low-threshold consumer credit products make it easy for them to borrow,” said an employee of a consumer finance institution who spoke to NewsChina on condition of anonymity. 　

Some platforms attract clients by obfuscating fees and downplaying risks. On shopping platforms, installments appear as one of the payment options along with debit, Alipay or WeChat Pay, and many consumers may find they are actually borrowing without even realizing it. 　

In October 2020, the CBIRC criticized Merchants Union, one of China’s leading consumer finance companies, for blurring interest rates in its promotions and ads that mislead consumers as to borrowing and payment terms. The company said it has since corrected these practices. 　

A general issue with cash loans is that, unlike home or car loans, borrowers are often not restricted by purpose of loan, debt ratios or even credit history. This allows them to borrow from multiple platforms, usually at high interest rates, to cover other outstanding debt, creating a vicious cycle. 　

To expand business, internet companies cooperate with established online platforms to develop targeted loan products, from education and housing to tourism. The platforms act as middlemen between consumers and lending platforms or as brokers, and have vested interests in the transaction. 　

However, this can also be problematic. In 2020, many consumers who borrowed for education or housing were left high and dry when platforms failed to deliver. In a scandal that hit the rental market at the end of 2020, housing platform Danke failed to pay landlords, who then evicted innocent tenants who had paid rent up-front for a year. Many were cash-strapped young people who had borrowed to cover their rent. 　

Liu Xiaochun, vice president of think tank Shanghai Finance Institute, said that something was off about the pattern of housing loans. The platforms accrue capital by asking renters to pay a year’s rent upfront but paying landlords monthly. In this way these platforms are essentially borrowing from tenants, many of whom actually borrow and get in debt, to invest in other ventures. “There is deception in the products’ designs and risk management,” Liu said. 　

“China is in a period of industrial structure adjustments, putting more emphasis on services,” said Chen Zhiwu, director of the Asia Global Institute at the University of Hong Kong. “Consumption is playing an increasingly important role and consumer loans have become an irreplaceable part of that. No wonder problems emerged in the process, as participants are learning as they go. But it’s not reasonable to deny consumer loans and their contributions over a few isolated problems,” Chen said. 　

A report published by Guotai Junan Securities in 2019 shows that household debt climbed from 39 percent in 2015 to 55 percent in the middle of 2019. In 2008, it was only 17.9 percent. At the end of the first half of 2019, consumer debt increased to 44 percent of GDP, 16 percentage points higher than 2015. There are concerns over systemic financial risks if consumer and cash loans keep growing at the present rate. After all, the 2008 financial crisis in the US occurred following steady surges in household debt ratio. 　

Wang Hongling said that while the impact of micro risks will be limited to enterprises, macro risks, which will have far-reaching influence, need to be brought under control. He suggested that lenders strike a balance between their capital and the amount they lend, and control the source of funds to avoid systemic risks. This is where regulators are gearing up efforts. 　

Unlike traditional banks, finance companies do not receive deposits and mainly rely on inter-bank borrowing and bank credit for capital. Issuing ABS (asset-based securities) or financial bonds is a common means. The ICEPT report shows that shares of ABS and financial bonds rose prominently among finance companies in 2019. 　

The scale of consumer finance-related ABS amounted to 95.98 billion yuan (US$14.9b) in the first half of 2019, a year-on-year rise of 14.94 percent over 2018. ABS are particularly popular among internet companies and cash loan platforms for off-balance-sheet financing, which helps them expand at lower borrowing costs while evading oversight and keeping debt-to-equity ratios low. But the high leverage multiplies the risks, which could have profound impacts. 　

To rein in risk, Chinese regulators released a notice in December 2017 that prohibits lenders from selling or transferring credit assets via internet platforms or regional trading venues and demands funds raised in the name of transferred assets and ABS be put on the balance sheet. 

Under capital pressure, many online financial platforms started using their technological advantages in finding customers and risk management to strengthen cooperation with traditional commercial banks and licensed finance companies to underwrite loans. But the high reliance on platforms in risk control has aroused vigilance from regulators. 　

In July 2020, the CBIRC published a regulation targeting the online business of commercial banks, demanding they stay independent in risk management and remain prudent in offering loans while cooperating with online platforms, avoid excessive lending and monitor the flow of funds. 　

Following the cleanup in internet finance, the market for consumer loans is growing more regulated. Getting licensed is also becoming the norm. In 2020, five lending platforms, including one set up by Ant Group in Southwest China’s Chongqing, have received consumer finance licenses. 　

More regulations are on the way. In November 2020, the CBIRC and the central bank released a draft guideline targeting small lenders that is expected to quickly put an end to the fast-booming small loan market. According to the draft, the guideline will set stricter regulations, from cross-provincial loan business and the sources of funds to the qualification of shareholders and the use of loans. Experts believe this will raise the threshold and weed out unqualified lenders. 　

As supervision gets tighter, the rules for cash loan lenders and consumer finance companies will become unified, Wang said. Cash loan lenders are supervised by local finance authorities, while consumer finance companies are licensed and monitored by the CBIRC. The two supervision systems vary greatly in specific regulations, supervision practice and issuing punishment. 　

“It’s the regulators’ job to try every means to plug loopholes to prevent systemic risks. As for loan providers, they need to adopt better means of assessing clients,” he added. 　

According to Wang, low-threshold online consumer loan firms are not doing enough to evaluate their borrowers, making defaults more common. 　

Identifying qualified borrowers and reducing risks, which can be achieved technologically and mean more investment, will raise the threshold for borrowing and probably run against the spirit of inclusive finance that aims to cover as many people in need as possible. But first, inclusive finance must be affordable for both lenders and borrowers, Liu Xiaochun said. 　

“If borrowers’ salaries are too low to repay their loans, lending to them could increase their families’ burdens instead of relieve them.”