Internet-based lending has enjoyed a robust decade in China, buoyed even further when the government announced its ‘Internet Plus’ action plan. This includes integrating the internet with traditional consumer industries, according to a statement released on 4 July, 2015, by the State Council.
But the steady rise of online lending has been challenged this year. In January, a new regulatory scheme governing ‘micro-loans’ and internet-based lending came into effect, according to Moody’s research on consumer asset-backed securitisation published on 22 January (New Regulations for Internet-based Lending Are Credit Positive).
“China’s internet-based micro lending market will shrink, particularly among borrowers with weak credit profiles who rely on taking out new loans to repay outstanding debts,” says Elaine Ng, a Hong Kong-based vice-president and senior analyst at the New York-headquartered credit rating agency.
In her report, Ng notes that only strong loan originators will remain in the sector, improving underwriting standards and risk controls.
Some lending platforms are looking for alternative sources of liquidity. “Even the larger ones (peer-to-peer lenders) are struggling to get liquidity from the banks, and they are lucky if they have a big enough [loan] pool to do a securitisation,” says a Hong Kong-based partner at a law firm.
To make new loans, these platforms will have to package up their existing loans to free up more capital in order to issue more loans to end-users.
Additionally, the buyer pool of asset-backed securities is relatively smaller. In the case of Hong Kong, banks, private funds and a few listed corporates are focusing on buying these ABS products originated by internet-based lending platforms, says the lawyer.
As a way of mitigating this liquidity risk as the regulatory environment changes, there has been a discussion in the industry about pooling loans originated by marketplace lenders. “That has not materialised, but the talks have been ongoing,” adds the legal source.
Another regulatory change is the Cyber Security Law, which became effective in June 2017. According to Article 37 of the CSL, personal information and other important business data gathered or produced by critical information infrastructure operators during operations within mainland China should store the data within the country.
Such a policy will have a significant impact on multi-national enterprises with operations in China as the data should not be transmitted cross-border once the information systems are classified as critical information infrastructure, according to Deloitte China’s risk advisory team.
Asked about any implication of the law for the firm’s China operation, Dennis Cong, a managing director and partner of CreditEase, which manages the CreditEase FinTech Investment Fund, says: “That is not affecting our business at all because consumers are voluntarily providing personal data.”
However, he thinks that this is likely to have more impact on internet companies which use consumer data to monitor behaviour and analyse or sell data sets to other entities without seeking consumer authorisation.
Lending to platforms
CreditEase, a Beijing headquartered marketplace lending platform, is not only originating consumer loans in China but also acting as an institutional investor to other lending platforms with similar business models to help them grow.
Two senior investment managers who oversee investment portfolios for pan-Asian funds of funds tell PDI that the venture debt strategy is not seen as a suitable investment due to its risk-return profile.
“If you want to invest in venture, you typically look for upside potential rather than downside protection,” one of the sources says.
Cong agrees that venture debt investors are likely to face duration gaps, as well as significant credit risks that are challenging to assess.
Its latest private debt vehicle targeting the venture debt strategy is called Offshore Private Credit Fund and was sized at $100 million as of 15 June with a three-year fund life, according to a spokesperson from the firm. Yiting Pan, a New York-based managing partner at CreditEase, oversees the investment activities of the vehicle.
CreditEase works with platforms on investment terms designed to provide sufficient protection over investments while also avoiding unnecessary extra capital costs to the platforms, according to a spokesperson.
Cong says the private debt fund invests in short-term unsecured consumer loans and small and mid-sized enterprise loans that carry higher returns than those of bond investment assets where you can get up to five percent. “These assets give you high single-digit returns. That is the type of debt asset that you are investing in,” he adds.
Cong believes there will be more foreign institutions in particular looking at the Chinese consumer banking sector, teaming up with domestic financial institutions. “They want to find a way to invest in our loans in China,” he says.
On 19 June, Yirendai, a subsidiary of CreditEase, announced that Goldman Sachs, the New York-headquartered investment bank, had committed 324 million yuan ($47.1 million; €41.2 million) to the firm in a form of a three-year funding facility. Goldman Sachs previously launched Marcus, its consumer lending business, in 2016. Its typical annualised percentage return ranges from seven to 25 percent, according to public documents.
The marketplace lending segment is predicted to face a shake-up and some large firms are building scale to put themselves in the forefront as the landscape is redesigned.
But in China there is perceived to be a real risk in the consumer sector. “I think the whole economy [in China] is trying to deleverage [from the corporate] to the household [level],” says Gary Ng, a Hong Kong-based economist at Natixis, a French investment bank.
He adds that China’s latest regulations loosening requirements for large issuers doing ‘debt-to-equity swaps’ backs his observation.
“Households in China have plenty of room to leverage. And they will be involved in China’s deleveraging process, or the process of reallocating the leverage from corporate to household,” he adds.