南华早报，2018-11-12，South China Morning Post,    

       Why China’s online lending crisis makes liberalisation of bank interest rates more urgent.

- Joe Zhang says as many of China’s online lenders fold, a key question is whether they should continue to exist alongside banks subject to interest rate controls.      

    - There is also a compelling case for regional Chinese banks to rejuvenate themselves by acquiring online lenders. 

   

How big is China’s fintech sector? I would say, Britain’s peer-to-peer (P2P) lender Funding Circle plus payday lender Wonga times 100. In addition to giants such as Alibaba’s Ant Financial, Pingan’s Lufax and Tencent’s WeBank, a dozen mid-size operators have gone public in the US and Hong Kong in the past 18 months alone. There are also 40 to 50 serious players that are waiting in the wings to go public. However, as the year-long official clampdown has revealed, there are far too many also-ran operators and Ponzi schemes about.

There is huge diversity in this fintech field: while most players are online lenders, some are data analysts, risk control specialists, delinquency workout firms and collection agents using artificial intelligence. Even among the online lenders, some use peer-to-peer funding and others rely on corporate and institutional funding.

In just five to six years, fintech has surged to levels over US$200 billion in terms of total assets. This has been thanks to the proliferation of smartphones, the country’s convenient payments infrastructure, and, more importantly, the quiet encouragement of the regulators until late last year. Well over 100 million people have been drawn in as either funders or borrowers, or both.

A large number of regulated financial institutions and state-owned enterprises have been involved in this huge movement. Of the 2,000-odd P2P lending platforms, about 100 are controlled by state-owned enterprises. In fact, many such entities came into being with government officials as the cheerleaders.

Fintech entrepreneurs like to use these facts as evidence that a large section of the population is not served or under-served by banks. It is hard to argue with them. However, as hundreds of online lenders run into “liquidity problems”, and as tens of thousands of retail funders and borrowers loudly voice their grievances, the Chinese government suddenly finds itself in a regulatory dilemma.

Given that it is hard to put the genie back in the bottle, a consensus has emerged that the government should regulate the fintech sector. But how? A licensing and registration process has been pushed back twice, and the new deadline is next June.

I expect further delays as it is hard to determine which among the still-operating platforms should be allowed to survive and which must be shut down. The most difficult questions include issues of capital adequacy, and who should pay for the winding down of those that fail to get a licence. Indeed, a more fundamental question is whether P2P lending is too dangerous an animal, particularly alongside a banking sector that is still subject to interest-rate controls.

Four decades ago when the country started its economic reforms, it had just one bank, the People’s Bank. Since then, credit has grown relentlessly, and China today boasts 1,300 banks of varying shapes and sizes. Trouble is, all the regional banks fear losing relevance as their non-performing loans pile up and as their local turf is being eroded by the new challengers like the online institutions.

To defend their honeypots, some regional banks have embraced the challengers by providing the latter with funds, retooling their own information technology systems, and revamping their methods for customer acquisition and underwriting. However, no bank has so far acquired an online lender, probably for fear of the regulatory wrath.

Someone has to make the first move as there is a compelling case for this marriage that seems made in heaven. Fintech operators can be powerful but need supervision as well as regulatory protection, while the regional banks desperately need rejuvenation.

The fire and fury of the fintech sector has highlighted the crudeness of China’s public administration. For example, the People’s Bank of China has long denied the fintech sector access to its credit bureau data, forcing online lenders to make loans on the basis of their patchy proprietary data, or just take “shots in the dark”, as one entrepreneur called it.

This has contributed to the sector’s sky-high delinquency rates and the existence of a rampant underground market for personal data. The fact that millions of people are willing to knowingly risk their savings on dodgy P2P platforms confirms that they see the returns they normally get from their bank deposits as a rip-off. Liberalising interest rates has become ever more imperative.

 Joe Zhang is the vice-chairman of Hunan Yongxiong Distressed Asset Recovery Inc 湖南永雄