Chinese Regulatory Agencies Suspend Licensing for Internet Microlenders, Cash Loan Industry Facing a Major Reshuffle

The Chinese government has stepped up its control over the cash loan industry, causing the stock prices of US-listed Chinese internet finance companies to plunge.

During pre-market trading on November 21st, the stock prices of Chinese internet finance companies plunged on the US stock market, with Qudian dropping by 30%, CRF by 17%, PPDAI by 14%, Yirendai by 13%, and Rong 360 by 8%. Qudian shares have lost 60% of their peak market value.

The plunge was caused by the Chinese government’s issuance of the “Notice on Immediate Suspension of Licenses for Internet Microfinance Companies”, suspending licensing for new internet microfinance companies in an industry that has seen its value spike in recent years.

According to partial statistics, as of November 2017, 254 licenses have been issued for internet microfinance companies. Based statistics from the Economic Observer, companies applying for licenses fall into four categories:

  • Listed companies, such as TCL, Hengda, Fosun, Poly Real Estate, GF Securities, Debon Logistics, Yutong Bus, Wanda, etc.
  • Internet companies, such as Alibaba, Baidu, Jingdong, Xiaomi, Vipshop, Ctrip, YY, etc.
  • Financial groups, internet platforms, and traditional small loan companies, such as CreditEase, Fenqile, Lakala, etc.
  • Other categories, such as software companies.

Besides suspending new licenses, the Notice also prohibits permits for small loan companies to expand their small loan businesses across other provinces, districts, and cities, as the “cash loan” businesses carried out by some organizations carry high risks.

As the main product of the internet-based small loan businesses, cash loans will face further regulations.

Cash loan companies that have already obtained the license cannot sit back and relax either, as they may be among the first to be impacted by public regulation and strict scrutiny.

As industry standards develop, the products and credit markets that internet-based small loan companies are allowed to engage in will also be subject to regulation. According to a Caixin News reporter, there are far more organizations underutilizing the value of their licenses than those that can fully utilize them. 50% of the internet-based small loan companies do not actually run internet businesses; they use a traditional small loan business model or wait for the right time to venture into internet businesses instead. 30% of the companies offer cash loans and secondary installment loans. 20% of the companies offer self-sustaining financial products related to the businesses or industries that they are in.

According to Wangdaizhijia’s statistics, many of the entities currently conducting cash loan services do not hold a license for internet-based small loans. Besides the minority of platforms that hold such licenses such as Qudian, Fenqile, 51 Credit Card, etc., thousands of cash loan platforms do not have the legal right to make loans. These platforms can only resolve regulatory issues with stock licenses with limited application.

There are claims that the value of existing internet-based small loan licenses will continue to rise. Kr-Asia believes that the price of licenses may indeed rise, however, the increase in price may be due to high opportunity costs for approval of transfer. Currently, most provinces have an extremely high threshold for licensing internet-based small loan businesses, and the finance offices in these provinces will not approve the transfer of licenses easily. Therefore, the cost associated with these licenses will be higher, driving prices up, but they most likely will not sell.

Stronger supervision does not mean the end of the cash loan industry. While many long-tail platforms are likely to be shut down, the mainstream companies operating in compliance with rules and regulations are likely to thrive.

We can speculate as to the reasoning behind regulation of small loans – limiting the number of players in the small loan industry will leave only the best mainstream companies standing. At present, it is clear – a major reshuffle is inevitable.