China to tighten online lending rules from 2022 in additional measures to rein in fintech giants, pre-empt banking crisis

Enoch Yiu
·4-min read

China’s banking industry regulator has tightened requirements on online lending by commercial banks and internet platforms from next year in a move to foster a steady pace of growth and pre-empt any financial crisis, analysts said.

The new rules will require all online lending platforms to contribute 30 per cent of the funding for loans they offer in partnership with traditional banks from January 1, 2022, the China Banking and Insurance Regulatory Commission (CBIRC) said in a statement on its website on Saturday.

The 30 per cent rule, first mentioned in a consultation paper in November, means platforms operated by the likes Ant Group, JD Digits and Lufax, will need to put up more of their own capital to make new loans. Currently, they contribute about 20 to 40 yuan for every 1,000 yuan (US$154.50) of loans, while commercial banks assume most of the credit risks.

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The tightening came as fintech giants expanded their reach to a billion online users and teamed up with banking partners, stoking concerns about systemic risks. They lent US$516 billion in 2019, a 42 per cent increase over 2018, according to China‘s central bank.

“The new regulation is necessary as online lending has expanded to a dangerous level,” said Tom Chan Pak-lam, chairman of Institute of Securities Dealers, an industry body of local brokers. “Without proper regulation, it may trigger a financial crisis.”

A logo of Ant Group at the headquarters of the company, an affiliate of Alibaba, in Hangzhou, Zhejiang province, China. Photo: Reuters.
A logo of Ant Group at the headquarters of the company, an affiliate of Alibaba, in Hangzhou, Zhejiang province, China. Photo: Reuters.

Saturday’s announcement also imposed several restrictions on commercial banks in these types of lending. Among them, the amount of internet loans issued by a bank with one online lending partner must not exceed 25 per cent of its net tier-one capital, CBIRC said.

The total balance of co-lending loans with online platforms also cannot exceed 50 per cent of their total loan book, the regulator said. Banks need to make sure they can meet these targets by July 17, 2022, according to the statement.

In addition, regional banks can only serve local customers within their borders from next year, and are not allowed to tap nationwide customers with the help of the online lending platforms, the regulator added. Digital banks, trust companies, consumer financing firms and car loan providers also need to comply, according to CBIRC.

The new rules will add to a slew of curbs since July last year in the banking and property sectors, as the government keeps an eye on leverage to prevent any banking crisis and social unrest, while it works to restore economic growth after putting the Covid-19 outbreak under control.

A sign of wealth management platform Lufax is seen during an expo in Beijing, China December 11, 2015. Picture taken December 11, 2015. Photo: Reuters.
A sign of wealth management platform Lufax is seen during an expo in Beijing, China December 11, 2015. Picture taken December 11, 2015. Photo: Reuters.

In recent years, mainland commercial banks have increased their collaboration with fintech giants to expand their business, introducing relatively new, untested algorithms and risks into their loan portfolios, the industry regulator said in a November paper. Banks will not have collateral to fall back on if data-driven lending turns sour, it added.

“We think the new rules can prevent banks from over-relying on online lenders for credit assessment and over-concentrating on selective fintech partners,” Citigroup analysts led by Judy Zhang wrote in a report on Monday.

She believes the new rules will benefit nationwide lenders such as China Merchants Bank and Ping An Bank by restraining competition from fintech giants, and hurt regional lenders by restricting their business scope.

The new rules will “reduce systematic risk in the case that banks become a pure funding channel without fully understanding the potential credit risk and overly relying on selective Big Tech partners for credit assessment,” she said.

The latest curbs may erode the valuation of internet giants such as Ant Group, should its stock listing plan be revived, according to Louis Tse Ming-kwong, managing director of Wealthy Securities. Online lending will become more expensive given the cost of additional capital.

Chinese authorities scuppered Ant Group’s record-breaking US$34.5 billion dual-listing in Shanghai and Hong Kong on November 3, two days before its trading debut, amid concerns about systemic risk and consumers’ privacy.

Since then, Beijing has issued new regulations and launched an antitrust probe into the fintech companies including Ant Group, an affiliate of Alibaba Group Holding, which in turn is the owner of this newspaper. Ant Group, JD Digit and others have also removed bank deposits and insurance products from their platforms.

A spokesman for Ant Group declined to comment on the new rules announced on Saturday.

“The new rules are aimed at fostering long-term quality growth” within the online lending industry, analysts at Jefferies wrote in a note on Sunday. “The grace period, in our view, should enable smooth transition.”

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