HONG KONG (S&P Global Ratings) Nov. 17, 2020--Proposed rule changes on internet lending cited in the recent abrupt suspension of Ant Group Co. Ltd.'s IPO are in line with Chinese regulatory trends, given technological disruptions in finance are insufficiently captured by the existing regulatory framework. S&P Global Ratings expects the Chinese government will continue to update its regulations and guidelines to manage the growth and risks brought by the fast evolving fintech industry.
"The withdrawal of Ant Group's IPO underlines the uncertainties facing fintech companies as Chinese regulators seek to reduce uncontrolled technological disruption in banking and protect consumers from excessive borrowing," said S&P Global Ratings credit analyst Fern Wang.
The China Banking and Insurance Regulatory Commission (CBIRC) and the People's Bank Of China (PBOC) jointly announced the "Draft Interim Internet Micro-lending Governance Rules" on Nov.2, 2020, to be followed by a one-month consultation period. If implemented, the regulation could severely weaken Ant Group's consumer and small and micro finance business. This segment contributed as much as 39% to its first half 2020 revenue and is the major growth engine of the group.
The rule change would likely slow lending growth for the more than 200 licensed internet lenders in China. These online lenders typically offer small, unsecured loans and are not permitted to take deposits. Their licenses were initially granted by local financial bureaus under relatively lax regulations compared with those for banks. The new regulations aim at constraining leverage for such lenders, and preventing excessive consumer borrowing.
The proposed regulations are also designed to create a more level playing field and reduce regulatory arbitrage, in our view. Banks for example, are subject to tight regulatory oversight and are expected to provide a reasonable level of capital contribution to their unsecured consumer lending business.
In comparison Ant Group, for example, does not need much capital commitment to run its consumer lending business. It only retains on its balance sheet 2% of the total outstanding credit balance on loans it originated; 98% of the loans originated were off-loaded to investors via structured finance products or to commercial banks that were keen in expanding their exposures to consumer credits. Some 80% of Ant Group's originated loans are to individual retail customers. The total as the end of the first half of 2020 amounted to about Chinese renminbi 2.1 trillion (US$325 billion).
In contrast to the emphasis on innovation and risk-taking that fintech companies wanted, China's proposed rules on internet financing would constrain cross-provincial lending; limit maximum loan amounts; require a minimum 30% capital contribution to joint borrowing, restrict leverage including use of asset-backed securities instruments; and impose minimal capital requirements on the internet small loans companies.
"While pro-innovation, Chinese regulators' top priority is financial stability," said Ms. Wang. "They have a particularly strong incentive to manage fast-growing consumer lending to lower-income borrowers."
Our analysis shows that China's banking system is more exposed to technological disruption than those of other major countries'. To analyze the impact of fintech on retail banking, S&P Global has developed a four-factor gauge of banking systems sensitivity to technology, regulation, industry, and client preferences (TRIP). Of the 22 markets/countries to which we've applied TRIP analysis, China is the only one assessed as having a very high disruption risk from technology. This is due to the significant inroads made by China's Big Tech firms in fintech through their platform and heavy investment in technologies like Big Data, AI analytics, and loud computing (see "Tech Disruption In Retail Banking: China's Banks Are Playing Catch-Up To Big Tech, published on RatingsDirect on May 14, 2019).
In China, fintech is dominated by large firms such as Alibaba Group Holding Ltd.'s Ant Group and Tencent Holdings Ltd. Such firms have turned China's consumer market into one of the world's most digitalized, as measured for example by the percentage of online sales to total retail spending. These companies are driving disruption in retail banking with e-payments, deposit-like funds, and Big Data-assisted consumer lending.
Since 2017, China implemented a series of regulations to manage disruptions caused by fast-growing fintech activities. New rules were rolled out after a money market fund under Ant Group, Yu'ebao, grew to become the world's largest--raising the specter of liquidity shocks in the event of mass withdrawals. The subsequent regulations on money market funds constrained growth.
Regulators have also implemented a centralized payment clearing system (NetUnion) to prevent settlement risk of payment companies. Third-party payment services such as Alipay and WeChat Pay now have to deposit 100% of clients' funds with the PBOC, no longer enjoying the advantage of earning interest on those deposits.
In 2017, regulators reined in the unfettered growth in the peer to peer (P2P) consumer fintech industry driving most of these players out of the industry. CBIRC indicated in November 2020 that only a handful P2P internet lenders are left from a peak of over 7,000 just before the new rules took hold. Authorities cited predatory lending as the main impetus for tightening licensing and oversight in the P2P market.
"We expect the Chinese government will further update its regulations and guidelines to manage the growth and risks brought by the fast evolving fintech industry," said S&P Global Ratings credit analyst Ryan Tsang. "The challenge for regulators is to find a fine balance in encouraging innovation and keeping associated risks in check to make sure financial system stability is not jeopardized. We also believe they will seek to reduce opportunities for regulatory arbitrage to level the playing field in terms of regulatory supervision for fintech players and traditional financial services providers.
Related Research
- Tech Disruption In Retail Banking: China's Banks Are Playing Catch-Up To Big Tech, May 14, 2019
- The Future Of Banking: Will Retail Banks Trip Over Tech Disruption? May. 14, 2019
- The Future Of Banking: As China's Internet Firms Grow The Financial Services Pie, Banks Angle For A Larger Slice, Oct. 30, 2018
This report does not constitute a rating action.
S&P Global Ratings, part of S&P Global Inc. (NYSE: SPGI), is the world's leading provider of independent credit risk research. We publish more than a million credit ratings on debt issued by sovereign, municipal, corporate and financial sector entities. With over 1,400 credit analysts in 26 countries, and more than 150 years' experience of assessing credit risk, we offer a unique combination of global coverage and local insight. Our research and opinions about relative credit risk provide market participants with information that helps to support the growth of transparent, liquid debt markets worldwide.
| Primary Credit Analyst: | Fern Wang, CFA, Hong Kong (852) 2533-3536; fern.wang@spglobal.com |
| Secondary Contact: | Ryan Tsang, CFA, Hong Kong + 852 2533 3532; ryan.tsang@spglobal.com |
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