Crackdown looming . . .
The wave of digitization shows no signs of slowing down in China’s mobile-dominated market. But one digital solution, microlending, may be spinning out of control. Microloan services have become so prevalent that apps that have nothing to do with fintech are heavily advertising their own in-app loan services. Big players like Weibo, a microblogging website, and Meituan, a shopping platform, are now facing accusations of false advertising. On social media, users complain of misleading tactics to lure them into borrowing, not being informed of processing fees, being flooded by debt repayment notifications, and bit hit with hidden interest rates at or above 36 per cent – the maximum allowed by Chinese law. The market has long been loosely regulated, but financial regulators acknowledged the seriousness of the problem at a December press conference and drafted a set of new rules to crack down on companies.
Filling a gap . . .
In China, tech companies fill gaps left by the low penetration rates of traditional banking. Tech companies have certain advantages over traditional banking – including big-data analytics and cloud computing – allowing many businesses to access credit with just a touch of their phone. A loose regulatory environment, coupled with a tech-savvy consumer base, has allowed for tremendous innovation in the sector, propelling China to become the “FinTech capital of the world.” In the context of the pandemic, the Chinese economy grew by 2.3%, but regulators now fear rising debt levels and the risk of default. The new rules will place tech companies under constraints similar to those of banks, raising the requirements for providing loans and also capping the amounts they can lend.
Implications for investors . . .
As Canada aims for investment diversification, understanding the rapidly evolving Chinese mobile money market is essential. According to APF’s Investment Monitor, financial services is the third-largest recipient of Canadian outbound FDI investment into China, and within the sector, consumer finance dominates. Canadian investors entering the Chinese market will need to pay attention to the tightening regulatory environment. They should also watch for shifting consumer spending habits, as it remains unclear what effect the looming loan caps might have on liquidity flows.
- Financial Post: China issues draft rules to regulate online micro-lending business
- Protocol: Chinese microlending is getting weird and dangerous
- South China Morning Post: What China’s clampdown on online microlending means for fintech giant Ant Group