Finance | Micro-lender assault threatens path to US listings

A new assault by Chinese authorities on the country’s cash micro-lenders threatens to stymie any new listings in New York, as regulators in Beijing escalate their campaign to reduce risks in China’s USD40 trillion financial-services sector.

According to the International Financial News, China plans to purge the country’s 157 online micro-lenders, leaving only large state-owned companies and the biggest internet firms intact with licenses. Few of the existing lenders will survive, said the newspaper, which is managed by the official People’s Daily.

A comprehensive cleansing of the industry, which offers almost immediate unsecured loans over the Internet, often at high interest rates, would escalate earlier moves to crack down on the sector and its estimated $152 billion of loans. News that China has halted further approvals for online micro-lenders has already pummeled the New York shares of firms like Qudian Inc. and PPDAI Group Inc.

If existing firms were to come under scrutiny, it would be especially bad timing for Yangqianguan, LexinFintech Holdings Ltd., Dianrong and other Chinese online lenders currently seeking or at least weighing initial public offerings in New York.

“It would seem to be an enormous, enormous risk to try an IPO with that hanging over your head,” said Christopher Balding, an associate professor at Peking University HSBC School of Business. “It would most likely put a halt to any IPO plans of these companies now.”

A spokesman for LexinFintech declined to comment, but pointed to the firm’s IPO prospectus which said the company issued loans with an effective annual percentage rate of 25.3 percent and an average duration of 9.4 months in the first nine months of 2017. The prospectus also said that LexinFintech draws from “diversified funding sources,” including institutions.

Yangqianguan didn’t respond to calls and an email seeking comment. A spokeswoman for Dianrong declined to comment.

The International Financial News report cited an unidentified person with knowledge of recent orders from the State Council’s Financial Stability and Development Committee.

Qudian shares have fallen 33 percent since listing last month in New York. PPDAI started trading in November and has tumbled 37 percent.

Putting a shorter rein on China’s micro-lending sector is in step with the government’s broader campaign to curb excessive leverage and preserve the nation’s financial stability. That drive will focus on four areas: shadow banking, asset management, financial holding companies and Internet finance, central bank governor Zhou Xiaochuan in October said in a speech in Washington D.C.

Last week alone, regulators proposed sweeping rules to curb risks in $15 trillion of asset-management products, and laid out new limits on bank shareholdings, partly aimed at better protecting domestic lenders.

It’s not clear which companies might be snared by a proposed cleanup of micro-lenders. Moreover, some peer-to-peer lenders – platforms that directly match borrowers with willing investors – also offer short-term cash advances.

More than 60 of the so-called P2P firms in China have a cash-loan business, according to Yingcan Group. The total monthly value of short-term cash lending surged to about 12 billion yuan ($1.8 billion) in October from 789 million yuan in January last year, the research firm estimates. It values total outstanding cash loans in the country at over 1 trillion yuan.

Some businesses have already responded to the crackdown. Zhejiang Busen Garments Co., which has a market value of 6.77 billion yuan in Shenzhen, said this week it scrapped a plan to set up an online micro-lender, citing the suspension of approvals for such entities. Nexgo Inc., a Shenzhen-listed electronic-payments company with a similar market capitalization, did the same yesterday.

Xiamen city in Fujian province will halt the registration of businesses that have “online lending” or “P2P” in their names or that engage in those activities, the city government’s Financial Affairs Office said in a statement.

Dianrong, a Chinese P2P lender that is weighing a possible IPO, sells commercial loans to small businesses. But the company also offers money in as little as 10 minutes to individuals who pass a credit evaluation, according to its website.

Dianrong earlier this year put its market value above $1 billion after four fundraising efforts that garnered $300 million.

The most recent clampdown has been spurred by claims that some cash micro-
lenders, which offer short- term loans to borrowers with poor credit histories, had been charging excessive interest rates. The industry has grown rapidly in the past year, following a 2016 crackdown on P2P lenders.

“The sector is absolutely ripe for some type of regulatory address because my sense is that the regulators have very little idea as to what’s going on,” Balding said. “I would expect that in typical Beijing fashion they will go in with a sledgehammer and ask questions later.” Bloomberg