China's fintech sector grows fast amid tighter regulations: report

Driven by the increased availability of third-party platforms, online financial services in China have seen rapid growth amid tightened regulations, Moody’s Investors Service said in a recent report.

Total outstanding consumer credit in China totaled 36 trillion yuan (US$5.2 trillion) as of the first half of 2018, with mortgage loans accounting for 67 percent, credit cards for 17 percent, and third-party platforms a combined 15 percent, according to economic data provider CEIC.

Excluding mortgages, the nation’s total outstanding consumer credit reached 12 trillion yuan as of the first six months of 2018, maintaining an annual growth rate of 28 percent since 2015, the report said.

The growth reflects increases personal income and consumer spending in China, and also the strong desire to generate returns above cash-deposit rates, Moody’s noted in the report.

In China, there are two main types of third-party platform, namely partnerships between financial institutions and technology companies, as well as peer-to-peer (P2P) platforms through which individuals, rather than financial institutions, make loans.

Thanks to these fintech firms, consumers and small companies now have easier access to loans and different types of investment, thereby helping support the country’s economic development.

For example, the number of consumers investing in wealth management products online jumped 66 percent to 169 million by the end of the first half of 2018, from the same period two years ago, according to the China Internet Network Information Center.

These products include those distributed through bank platforms and third-party platforms.

Meanwhile, the sector, especially P2P platforms, has suffered relatively high default rates and a number of them have failed. Data from Wangdaizhijia, a web portal that tracks the industry, indicated that the number of China’s operating P2P platforms has been reduced around a half as of the third quarter of 2018.

In response to the fragility of this unregulated industry, watchdogs have tightened supervision since the second half of 2016.

In particular, the People’s Bank of China and the China Banking and Insurance Regulatory Commission issued new regulations on 1 December 2017 that raised qualification requirements for lenders and curtailed their funding access.

For instance, the aggregate interest and fees that a lender charges a borrower cannot exceed 36 percent of the loan balance on an annualized basis. Further, banks are not allowed to accept guarantees from unqualified third-party online platforms.

Most recently, formal regulation of online financing was included in the 13th Five-Year Modern Financial System Plan jointly issued by nine government ministries in May 2018.

The rating agency predicts that in the near term, access to funding will remain a challenge for many third-party platforms, as China carries on its efforts to curb shadow banking.