What you need to know about China’s online microlending industry

China’s online lending space is growing too fast for regulators. For the past couple weeks the Chinese government has been homing in on the country’s online lending industry, which has grown exponentially in the last year and may be getting out of hand: regulations are loose, many of the players are unlicensed and it’s looking like an increasingly predatory business. The heightened sense of urgency to clean up the industry is illustrative of the structural challenges of online lenders even outside China. Online lending firms make money charging origination and service fees, unlike online banks like Goldman Sachs which generate revenue on interest. When an online lender originates loans it wants to take the fees and sell those loan as soon as it can, without dedicating the time and resources to evaluate the borrowers, and pass the risk onto purchasers of those loans. Here’s what you need to know about what’s happening in China today. What is online micro lending? The online micro lending space grew this year after a government crackdown on peer-to-peer lenders in 2016 that pushed companies into “cash micro-lending,” which offer immediate unsecured loans over the Internet at exorbitantly high interest rates — often 35 percent, though the legal limit is 36 percent. Sometimes lenders can take rates above 50 percent by adding “transaction fees” to the standard rate. The nearly 160 companies in this $152 billion industry have regulators’ attention today for the tendencies in “over-lending, repeat borrowing, improper collection, abnormally high interest rates, and privacy violations” that have become so prominent. The biggest names include Qudian (which is backed by Ant Financial), China Rapid Finance and PPDai. All three of them have raised funds or plan to in New York. By the numbers

• Online consumer lending in China accounted for more than 85 percent of global activity last year
• Unsecured online consumer loans hit $140 billion last year
• The online cash loan sector is projected to reach $347 billion by 2020
• Credit card penetration is growing: it’s expected to reach 44 percent in 2025 from 16 percent in 2014
• Today credit card penetration remains at about one-third of the population, according to the Chinese central bank

What’s happening? So far Beijing has been loose with the rules and now it’s reining them in. The Chinese government had been considering tightening the regulation of online consumer lending, which would slow the industry’s rapid growth. Late last month, the country’s “Internet finance” association basically told “unqualified institutions” to stop offering loans; the central government told regional governments to stop issuing microlending licenses to online players. It also stopped ongoing approval proceedings for new players. Finally, on Friday, financial regulators issued new rules targeting online micro-lenders: lending companies can't give loans to customers that don't have a source of income or mislead customers into over-borrowing; if an organization or individual doesn't have a license to make loans, they can't conduct a lending business; companies need to actually assess borrowers’ creditworthiness and repayment abilities; loans can “generally” only be extended twice, though the rules don't say anything about possible exceptions to the rule; micro-loans can't be used to speculate in the stock market or make down payments on property. Where is this coming from? China’s got a lot of consumer debt on its hands right now and a lot of it is coming from the online lending space. Unsecured online consumer loans hit $140 billion last year and now China wants to mitigate. Even though it was its leash tightening on peer-to-peer loans last year that got people in this situation in the first place. That’s great, right? Well, legitimate players that actually aren't sketchy at all exist — alt lenders PPDai, Jianpu Technology, and Qudian, for example, all of whom have seen their share prices fall as this narrative has been unfolding. Also, generally, it’s difficult to access credit from traditional financial institutions when most people don't have much of a credit history and with the trove of digital payments data all across China, online lenders have been easier to work with.