Borrowing at your peril

Chinese mainland regulators have reined in unrestricted internet lending to prevent large numbers of borrowers from buckling under mountains of debt. Zhou Mo reports from Shenzhen.

Liu Haikang (not his real name) opened social networking app Douban on his smartphone, and entered the words jiedai, or "money lending" in English, in the search box. The moment he saw the search results, he was somewhat relieved.

Groups with eye-catching names popped up, in which people of different ages and professions shared their suffering that resulted from unrestrained internet lending. Liu saw that he wasn't alone.

Liu has been tormented by his mountain of debt for a long time, accumulated from his years of borrowings from different channels — initially friends, then banks and, more recently, a food-delivery app. His debts snowballed from less than 100,000 yuan ($15,700) to more than 300,000 yuan — well above his annual salary.

"It's like taking drugs. Once you have a small taste of it, you could get addicted to it," said the 38-year-old, who is in charge of the e-commerce business at a Shenzhen jewelry company.

Internet lending isn't anything new on the Chinese mainland, as a growing number of people, especially the younger generation, have become accustomed to making deferred payments for products as diverse as meals, clothing, transportation, and travel. But the sprawling growth of the business has given rise to an alarming phenomenon — Chinese internet companies, big or small, fintech-related or unrelated, are all pouring in as lenders or loan facilitators, eyeing a piece of the pie in the country's burgeoning consumer finance market.

From office software WPS Office, real-time bus-information services provider Chelaile to travel booking app Ctrip, lending services can be seen everywhere. Tech companies are wasting no time in trying to translate their user traffic into cash.

While some platforms carry out the business through their own financial institutions, many other unlicensed ones work with banks, consumer finance companies or microloan companies. There are also a few unqualified players who go beyond legal compliance by using their own capital to finance those desperately in need of money.

Borrowing behavior is much more likely to occur in certain scenarios, whether it's online shopping, house renting or ticket booking, said Yu Lingqu, deputy director of the Department of Finance and Modern Industries at China Development Institute, a Shenzhen-based think tank.

"By traditional ways, you may manage to persuade only one person among 1,000 people to borrow. But through those platforms, the number is much higher," he said, citing a popular online shopping app that reportedly has a lending rate of 70 to 80 percent. That means for every 100 people to whom the app reaches out to promote its lending services, up to 80 eventually become borrowers.

"The huge profit margin from the business explains the extent of the lending spree. It cannot be denied that internet platforms have natural advantages in conducting the business, but it has also brought high risks," Yu said.

Driving the strong motivation to borrow is the boom in China's consumer lending activities. The size of the country's consumer-credit market is expected to expand from 13 trillion yuan in 2019 to 24 trillion yuan by 2025, representing annual growth of 11.4 percent, according to a report by global management consulting firm Oliver Wyman.

Game changers or risk bringers?

In a report earlier this year, Fitch Ratings said consumer credit is an important growth driver for China's consumer spending, accounting for 32 percent of overall retail sales in 2019 — up from 15 percent in 2014.

While expecting the credit business to continue fueling consumption growth in the country despite regulatory tightening of online microloans, the international ratings firm warned that tech companies' increasing exposure to consumer lending may increase their credit risk and lead to additional capital needs for their financial services operations.

"Many tech companies want to build a sound ecosystem for their development, and providing financial services is one of their strategies to achieve that. That is why the exposure of tech players to finance has become a trend," said Jenny Huang, senior director of China corporate research at Fitch Ratings.

It's a two-edged sword, said Katie Chen, director of Asia-Pacific Non-Bank Financial Institutions at Fitch Ratings. "While such diversification could promote their business, they will have to cope with more risks," she said.

Liu's first encounter with app borrowing began with a text message he received on his smartphone late last year. The promotional advertisement encouraged him to borrow money from online food delivery platform Meituan.

The possibility of securing more money enticed him. Ever since losing tens of thousands of yuan in the stock market, Liu has embarked on a journey of borrowing. Afraid of telling the truth to his wife, he borrowed money from his boss and friends and injected the money again into the capital market, hoping that share prices would rebound and allow him to make a fortune. It turned out to be just wishful thinking.

He then turned to banks, applying for a number of credit cards and using the money to refund his early borrowings. As the amount grew, Liu found it increasingly hard to clear up all the debts. "I had no other choice but to keep on borrowing," he said.

He's now indebted to three digital lenders — Meituan, mobile-payment app Alipay, and JD Digits, the fintech arm of e-commerce giant JD.com.

To attract more borrowers, many internet companies have eased scrutinizing the ability of borrowers to repay their loans. Some apps would require only a borrower's identity card and a bank card to complete the transaction, saying that the annual interest rate could be as low as 7.2 percent, which is often highlighted in advertisements saying "as low as 0.2 yuan per day for 1,000 yuan". But many people on Douban complained that the actual interest rate could exceed 36 percent after hidden service and processing fees are taken into account.

Debtors also recalled their bitter experience of being bombarded with numerous telephone calls and text messages for repayment, and their relatives and friends being harassed after the borrowers' personal information was leaked to third-party institutions.

"On the positive side, however, tech companies are the game changers in traditional finance, bringing in a new service philosophy and models to the system," said Deloitte China Risk Advisory Partner David Jiang.

"But compared with traditional financial institutions, which have developed a sophisticated system in their decades of development, the risk management system of tech companies is not that sound. The increasing exposure of tech players to financial services could bring new risks to the financial system," Jiang said.

Regulators are fully aware of the problem. The last-minute halt to Alibaba affiliate Ant Group's dual initial public offerings in Shanghai and Hong Kong in November 2020, plus subsequent investigations into other tech players like car-hailing giant DidiChuxing and Meituan, as well as a number of laws and regulations that have been unveiled or have come into effect since early this year, show that the Chinese government is determined to rein in the unrestrained growth of tech firms to thwart financial and data risks.

In February, the country's top banking and insurance watchdog issued regulations requiring commercial banks to carry out internet loan risk management and complete risk assessment independently. Outsourcing key components of the risk management operation will not be allowed.

The China Banking and Insurance Regulatory Commission also required that internet-lending platforms fund at least 30 percent of every loan they make, in partnership with commercial banks, from next year.

As Shenzhen aims to become a global fintech hub, three financial regulatory bodies in the city have vowed to enhance supervision of financial activities by internet platforms. According to a government document issued last month, regulators will prevent internet platforms from conducting financial activities on the pretext of offering technological services. An overall limit for internet platforms to invest in financial institutions will also be set.

Central Bank Governor Yi Gang acknowledged that fintech's development has brought new challenges for regulators. Some major Chinese internet platforms have obtained massive information on users when offering them e-commerce, payment, searches or services. They would then rate users' personal credit standing from analyzing the information obtained, and cooperate with financial institutions in the credit information business. "Such a practice amounts to conducting a personal credit information business without permission," Yi said at a Bank for International Settlements' conference on "Regulating Big Tech" in October.

He also warned that individual privacy and data security are being breached. "In most cases, Chinese consumers need to provide personal information (to internet platforms) to enjoy their financial services. But there are situations when large platform companies over-collect or even misuse consumers' information, which could affect data security and individual privacy."

China's Cyberspace Administration revealed in May that 84 apps had been involved in illegal collection of personal information, with more than half of them in the financial services business.

"The aim of the government's series of regulations on tech companies is not to curb their growth, but to ensure that the expansion is balanced and regulated. Against this backdrop, they will be stimulated to carry out a higher level of innovation to keep themselves afloat in the market," Jiang said.

He acknowledged that strengthened regulations will enhance operating costs for Chinese tech players, but said the government will impose different requirements for internet platforms of various sizes to strike a balance between protecting personal information and their business growth.

"The rapid growth of online lending in recent years has accumulated risks in the financial system. Stricter regulations will be positive for the industry's healthy and sustainable development," Chen from Fitch Ratings added.