Chinese financial regulators have crafted rules that clamp down on a burgeoning microcredit market in the world’s second-largest economy, a move that could dampen the profits of the country’s fintech giants and dampen the flow of funds to small businesses.

The release of the consultation paper on Monday coincided with a meeting between Chinese financial regulators, led by the relatively conservative People’s Bank of China (PBOC), and senior officials of Group of ants, the largest online microfinance service provider in China.

“This is a strong signal of tighter regulation,” said Shujin Chen and Alfred He, equity analysts at Jefferies brokerage, in an investor report.

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The draft rules could hamper the flow of cash to the sectors of the economy that need it most. China is recovering from the economic pain inflicted by coronavirus lockdowns this year, but small business owners and individuals are still struggling to get loans from traditional banks.

As regulators seek to reduce financial system debt, the draft rules could also reduce microlender profits by increasing compliance costs, reducing the amount of individual loans, and requiring online platforms to contribute funding. more loans instead of relying on traditional lenders. ‘balance sheets, analysts said.

Jack Ma at the Bund Summit 2020 in Shanghai on October 24. Photo: Weibo alt = Jack Ma at the Bund Summit 2020 in Shanghai on October 24. Photo: Weibo

Jack Ma, the Chinese billionaire who co-founded Ant and controls 50.5% of his voting rights, mentionned on October 24 that traditional lenders were being managed as “pawn shops” because banks always require collateral before lending. Going forward, he said, lending decisions should be decided through big data analysis.

A base board Ant’s strategy is to collect commissions by providing a digital platform for banks to reach small borrowers and more accurately assess credit risk. It is expected to make its commercial debut in Shanghai and Hong Kong in the the largest IPO in the world, after gaining approval from regulators last month. He pointed to regulatory developments as a risk for potential shareholders.

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The PBOC Yi Gang pays attention to the dependence of commercial banks on the risk management systems of technology companies. Photo: Bloomberg alt = The PBOC’s Yi Gang pays attention to the reliance of commercial banks on the risk management systems of technology companies. Photo: Bloomberg

PBOC Governor Yi Gang told a panel discussion at a FinTech summit in Hong Kong on Monday that innovation from big tech companies has made microcredit in the Chinese hinterland possible. . “It’s a huge improvement,” he said. Yi also said the PBOC noticed that commercial banks use the services of big tech companies to find clients and depend on them for risk management.

Regulators met with Ant executive chairman Eric Jing and chief executive officer Simon Hu on Monday, Ma, according to the securities regulator. The meeting also included representatives from the China Banking and Insurance Regulatory Commission (CBIRC), the China Securities Regulatory Commission and the State Administration of Foreign Exchange, the currency regulator.

They discussed the health and stability of the financial sector, and Ant will implement the meeting’s advice in depth, according to a company spokesperson.

Ant’s management likens Chinese banks to the arteries of the economy and Ant to the capillaries that send money to its ends – small businesses and individuals. The company’s personal and small business loans division generated 39.4% of its revenue in the six-month period ended June 30.

Ant issues loans, 98% of which are then taken out by financial institutions or securitized. As of June 30, he was working with a hundred banks.

Loans from banks through online platforms reached 1.430 trillion yuan on June 30, the PBOC said, accounting for 22% of personal consumer loans excluding mortgages and credit card loans.

Lufax debuted on Wall Street on Friday. Photo: Reuters alt = Lufax debuted on Wall Street on Friday. Photo: Reuters

The draft rules called for large online microcredit companies to be overseen by central regulators, including the PBOC and CBIRC, instead of local offices, suggesting more frequent reporting and monitoring of loans, analysts said.

The rules also prohibit regional banks from lending outside their provinces through online platforms. These banks are likely to be the heaviest users of online microcredit companies and have been keen to use digital platforms to find borrowers outside of their region, analysts said.

The rules also require online platforms to contribute at least 30% of loans, up from 1% to 20%, and loans cannot be used to invest in financial markets, real estate or to pay off mortgages. .

Online platforms will have at least a year to comply with the new rules.

Ma said Beijing’s emphasis on “preventing systemic financial risks” was wrong. “Innovation always comes with risk. There will be no innovation without risk… the biggest risk is that you try to minimize the risk to zero,” he said.

A third of the shares of Ant Group are held by South China Morning Post parent company Alibaba Group Holding.

This article was originally published in the South China Morning Post (SCMP), the most authoritative voice on China and Asia for over a century. For more SCMP stories, please explore the SCMP application or visit the SCMP Facebook and Twitter pages. Copyright © 2020 South China Morning Post Publishers Ltd. All rights reserved.

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