When Jia Xinru needed to borrow money to buy new clothes, order food and buy a projector to screen Breaking Bad on her wall, she had instant access to China’s growing number of lenders via her smartphone.
The 24-year-old secretary is among millions of Chinese who have turned to proliferating online companies that dish out quick loans — and are worrying the nation’s leadership.
On Friday last week authorities issued new rules on microlending, designed to protect consumers and limit risk for creditors. The move was the latest aimed at tackling financial risks as the world’s second-largest economy faces ballooning debt that has drawn warnings of a potential global financial crisis.
Photo: AFP
While most economists and analysts have focused their concerns on corporate debt, household debt has risen rapidly, roughly doubling since 2012, according to the Bank for International Settlements.
Smartphones have made it even easier for consumers to borrow cash in China, with e-commerce apps and mobile payment increasingly prevalent.
Jia started accumulating her debt when she was in college, turning to technology titan Alibaba Group Holding Ltd (阿里巴巴) when she could not get a credit card.
The ease of a few taps on her smartphone and a four-minute wait led Jia to borrow and borrow, and when she was finally able to take out a card, she used it to repay Alibaba affiliate Ant Financial Services Group (螞蟻金服).
However, her debt reached about US$9,000 this summer and her monthly interest payments eclipsed her meager salary.
She described the debt as “snowballing,” finding it harder to pay one debt as she borrowed to pay another.
Alternative lending, with loans that can be wired to accounts within minutes, has taken off in China and accounts for 85 percent of the market, a University of Cambridge report said.
By 2020, some estimates forecast the business could approach that of credit cards, suggesting some Chinese might be leapfrogging from plastic to mobile loans.
Online lenders say most of their business comes from consumers and small businesses with little access to the formal banking system — only a third of Chinese have credit cards, according to central bank data.
“Most of our borrowers are in third or fourth-tier cities,” said a marketing employee at lending platform Guangxindai (廣信貸), who declined to give her name. “They have a hard time getting credit cards from banks.”
The growth of the business comes as a new generation of Chinese shed their parents penchant for saving and embrace the credit culture.
“There’s a shift in China where people are now far more willing to take on debt,” UBS Investment Bank executive director of Asian financials research Jason Bedford said. “There’s been a tremendous push into consumer lending. It’s seen as the next lending nirvana.”
The lending market exploded as regulators permitted the spread of platforms and products, with technology giants Alibaba, Tencent Holdings Ltd (騰訊) and Baidu Inc (百度) all offering loans on demand through mobile apps.
The space also attracted a number of upstarts.
Online platforms Qudian Inc (趣店), PPDAI Group Inc (拍拍貸) and China Rapid Finance Ltd (信而富) have listed publicly in the US this year and a number of similar firms are waiting on the sidelines.
PPDAI’s platform has attracted 9 million borrowers and the volume of issued loans has increased fivefold since 2015, but with an eye on predatory lending and its aftereffects, the latest rules prohibit lending to consumers without income and cap interest rates at 36 percent annually.
Regulators have stopped approving new online microlenders.
The move sent the share prices of Qudian, PPDAI Group and China Rapid Finance tumbling in the past week and J Capital Research research director Anne Stevenson-Yang said the regulations could lead half of all online lenders to fold.
Managing risk can be a tricky balancing act for online lending platforms when a large portion of the Chinese population lacks credit scores.
Some platforms write off the bad loans, while others have taken defaulted borrowers to court.
Alibaba has built a credit scoring system called Sesame Credit that tracks users on its platforms and provides perks to those with high credit scores.
It has also limited annualized interest rates to 24 percent.
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