Clamp Down on Online Micro Lending

The Chinese government took steps to rein in the rapidly growing and lightly regulated market for online micro-lenders in the latest scrutiny over Internet finance, sending shares of U.S.-listed Chinese financial firms into a tailspin.

A top-level government body issued an urgent notice late Tuesday to provincial governments urging them to suspend regulatory approval for the setting up of new Internet micro-lenders.

The multi-department body, tasked by the Central Government to rein in risks in the Internet finance sector, also told local regulators to restrict granting of new approvals for micro-loan firms to conduct lending across regions.

China started a crackdown on the Internet finance sector last year, issuing guidelines and rules to regulate online financial activity following a spate of scandals, frauds and high-profile peer-to-peer (P2P) failures.

The cleanup has led to the creation of a top-level body comprising government entities that include the central bank and the banking regulator.

The crackdown on micro-lenders comes as authorities warn about rising household debt, which includes mortgages and consumer loans.

Unsecured consumer lending via Chinese online platforms more than tripled last year to almost US$140 billion, according to a recent report by the Cambridge Center for Alternative Finance.

On Tuesday, U.S.-listed shares in Chinese online lenders including Qudian, China Commercial Credit Inc., PPDAI Group, Jianpu Technology and China Rapid Finance, all sank.

Companies providing small loans, especially on the Internet, have expanded rapidly in the past year, partly due to loose government rules.

Such firms meet demand for credit from individuals who have been shunned by banks, which typically prefer big corporate clients.

Loan amounts span from a few hundred yuan to tens of thousands, with borrowers typically without steady incomes or any credit history.

Interest rates on these small loans can be more than 35 percent per annum, some even higher, and are not often appreciated by individuals who are drawn to the easy terms and conditions.

Some borrowers also take loans from one lender to refinance loans from other credit providers, causing a spike in their debts.

Tuesday’s move came just days after LexinFintech filed a US$500 million IPO with the U.S. Securities and Exchange Commission, the latest in a series of offerings from the sector.