FINANCE: Fintechs Sink on Regulatory Clampdown

Bottom line: A new crackdown on microlenders could put a slight damper on their growth, but is unlikely to affect them significantly next year unless China experiences a bad debt crisis.

Word that China will clamp down on the nation’s thriving field of online microlenders is sending a chill through the sector, as many predict new moves could severely slow down their breakneck growth. The newly-announced crackdown is only aimed at new microlenders, at least for now, with word that the central government has ordered all provinces to immediately stop issuing new licenses for such companies. (English article)

But like everything else in China, where there’s smoke there’s often fire not far behind. In this case, market watchers and participants are expecting this sudden freeze in new licenses is a prelude to a bigger clampdown, which is probably sorely needed. The explosion in microlenders over the last two or three years really does seem a bit out of control, and Beijing is clearly worried about the possibility of mass defaults due to poor risk management in this fledgling industry.

We’ll review the details on this new clampdown shortly, but the fallout is quite clear in the stock prices of a newly listed group of fintechs that have come to market over the last couple of months. Representative of the bunch is Qudian (NYSE: QD), one of the earliest to list, whose shares fell 4 percent in the latest trading session. The latest dip means the company’s shares have tumbled 23 percent over the last 5 days, and at their current price of $19.31 they now trade well below their IPO price of $24.

The newly listed Ppdai (NYSE: PPDF) dropped an even sharper 14 percent, and at current levels now trades about 17 percent below its IPO price. Another recent listee, Hong Kong-traded auto financier Yixin (HKEx: 2858), fell 7.5 percent in the latest session, and is now down 17 percent over the last five days. And the list goes on.

Qudian has become something of a bellwether for the group, being the first of these microlenders to list in the recent wave. The company was the toast of the town when it first began trading last month and its shares initially soared. But the party was short-lived, as its shares tumbled after its founder did an interview that seemed to imply he wasn’t very well schooled on risk management.

Qudian’s other senior managers quickly stepped in to ease market concerns, but I suspect Beijing regulators got quite worried over that incident, which showed how unaware this new crop of fintech entrepreneurs were of the risks of running such businesses. Their lack of awareness isn’t too surprising, since China has never undergone even a mild downturn in the last two decades, and most of these young entrepreneurs have therefore never known a time when people didn’t repay their debts.

Growing Worries in Beijing

But with mounting signs of an economic slowdown and even a potential debt crisis brewing, Beijing is clearly worried about all the new easy credit and lack of risk controls coming into the market. The latest reports cite a policy notice issued on Tuesday, in which the central government urgently tells provincial officials to stop issuing new microlending licenses.

Additionally, the new policy tells officials to restrict new approvals for microlenders to conduct lending business across provincial lines. But perhaps most menacing is a source quoted in one of the articles saying this initial step is just a first move in the tightening of government oversight for these freewheeling lenders. If more tightening moves come out, which seems almost inevitable, the effect could be chilling on the triple-digit growth that many of these microlenders are now seeing.

So, what does this mean for the sector, and could this spell the end to the recent flurry of new listings for fintechs? I suspect that like everything in China, the shockwaves being felt from this news will be relatively short lived and the shares could bounce back in the first part of next year. Beijing’s crackdowns always create jitters, but at the end of the day central leaders will hardly want to kill this new generation of fintechs that could well become the wave of the future.

Accordingly, we could see the group’s expansion slow down somewhat, but they are still likely to continue posting healthy growth. The one major risk, of course, is that a long talked-about debt crisis could finally emerge, in which case these companies could experience some major problems. But if that happens, China and investors will have much more to worry about than just these up-and-coming but inexperienced fintechs.