In early November, Ant Group’s planned $37-billion blockbuster dual listing in Shanghai and Hong Kong was brought to a halt by financial regulators. In the same day, Chinese regulators also published draft rules to boost the oversight of online micro-lending. Both actions have been interpreted as reflecting the government’s determination to tighten Internet finance regulations.
While the “Ant incident” is being hotly debated in Chinese media, many are also scrutinizing the draft rules that were announced almost at the same time as Ant’s discussions with regulators. Experts feel that in a long run, the new rules will not only impact the ability of Ant’s peers to raise capital, but also shake up the whole Internet finance business in China.
TECH OR FINANCE?
The new rules focus on the online micro-lending business. In China, with the development of the Internet, new business models bringing together technology, Internet and finance are emerging and evolving constantly, and regulations have struggled to keep up.
Before the issuance of the draft rules, regulators had previously revealed by various means that they were determined to draw a distinction between the technology and finance industries. On Nov. 1, the central bank-backed newspaper Financial Times commented in one article: “If large internet companies conduct financial business on a large scale but still declare themselves as tech companies, then they’re actually hiding away from regulations.”
A day later, Guo Wuping, head of the consumer protection division at China Banking and Insurance Regulatory Commission (CBIRC), put it more clearly by naming some well-known brands: “Fintech companies’ products such as Huabei Credit and Baitiao Credit are in nature the same with credit cards issued by banks … products such as Ant Cash Now and WeChat Loan are in nature the same with micro-lending issued by banks.”
As a new business following in the footsteps of online payments and peer-to-peer lending, online micro-lending has been expanding rapidly in the last few years. Hu Ji, partner at Haiwen & Partners tells ALB: “Online micro-lending has achieved sizable scale in a short period. Because the internet has no geological boundary, some companies have gained hundreds of millions of users, which could only be achieved by traditional financial institutes like banks for a few decades.”
Among those companies, top players keep scaling up by means of big data and other technologies. For example, according to Ant Group’s prospectus, its micro-lending technology platform earned 28.5 billion yuan in the first half of 2020, accounting for 39.41 percent of its overall revenue.
Micro-lending is not new in China. In the past, because lenders mainly served local communities, they were regulated by local finance bureaus as well. Later, when online micro-lending without geographical limits came into the picture, the regulatory framework stayed the same.
This lasted until 2017. In November that year, regulators urged provincial governments to suspend license approvals for new online micro-lending companies. “According to public statistics, by then, China had about over two hundred licensed online micro-lending companies and they formed the online micro-lending ecological group until today,” Hu says.
That status quo existed until Oct. 31 this year. On that day, China’s Financial Stability and Development Committee flagged risks associated with the rapid development of financial technology, and “the new draft rules correspond to the principles mentions by the Committee in its later published document,” Hu says.
RESHAPING THE ECOSYSTEM
According to Hu, the draft rules will “reshape the online micro-lending business to a great extent.”
“It says that in the future, license across regions will be approved by CBIRC, not local regulators. But how will CBIRC do it exactly? We still don’t know. I think only very limited numbers of companies could get such licenses,” Hu notes.
He also points to other terms within the draft rules that stipulate restrictions from the qualifications of shareholders to business locations. They will all cause “the shrinking of numbers of such companies.”
But Hu thinks the draft rules are no harsher than usual or necessary. For example, the draft rules set new requirements for small online lenders to provide at least 30 percent of any loan they fund jointly with banks and also for their debt-to-equity ratios, which are “common to see in existing financial regulations … those rules could help online microloan lenders to remain on track even when they grow too big.”
IPO WINDOW TEMPORARILY CLOSES
In the past few years, companies claiming to be in the fintech or Internet finance have been extremely popular in the capital markets, getting high valuations in Mainland China, Hong Kong and the U.S. But as Hu sees it, at least for those that have online micro-lending as their main business, “the IPO window has temporarily closed.”
“If there was uncertainty with the license approval, there is uncertainty with their businesses,” Hu says, “Capital markets will surely be sceptical about that.”
Companies will have 1 year to comply with the new rules and three years to obtain a cross-regional license once it becomes official. “If they could pass all the tests, of course, they could apply for IPOs again,” Hu adds.
And where should they do it? “Maybe more feasible in overseas markets, hence the A-share has a higher threshold. For example, if they apply for IPOs in the U.S., they could reveal the risks of not obtaining the license yet or only being able to do local business. There might be some chances.”
Law firms can also expect to see less work as a result. “Those who are currently in preparations for IPOs might also wait for the official rules and see their possibilities to get the license before filing for listings,” Hu says.
However, Hu sees other opportunities for law firms. “Lenders would need lawyers’ assistance on obtaining licenses from local bureaus or CBIRC; besides, they will need lawyers’ help on compliance issues to meet the changing requirements.”
Although there is no set schedule for when the rules will become official, Hu suggests companies should prepare in advance. “The most important is to enhance internal compliance according to the regulatory changes.”
“Regulations and the market are always in interaction and finding a balance is very important. Companies with real tech capabilities and could control risks reasonably will eventually stand out,” he adds.
Hu advises lenders not to be overly pessimistic: “Actually, under tight regulations, good companies would always become better.”
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