The website for China Rapid Finance features a cartoon of a young woman on a bicycle. Smiling in a red sweater and earrings, she pedals on an upward slope of prosperity, boosted along the way by loans of increasing value. With a $100 loan, she was able to purchase food. With $1,000, she supported her education. With $10,000 in loans, she might one day afford marriage, a car, and even a house. The message is clear: small loans are the ticket to a better life in China.
China Rapid Finance is one of thousands of private online micro-lending companies in China which, in recent years, have filled a critical gap in the country’s economy by extending credit to members of the lower and lower-middle classes, who traditionally have not had access to borrowing under the state-owned banking system.
Proponents of the payday and peer-to-peer loans offered by these companies assert that they offer borrowers upward financial mobility and the opportunity to achieve the trappings of a middle-class lifestyle. But the rapid proliferation of lending companies in an unregulated market has also led to widespread over-borrowing and a spate of predatory debt collection practices. More and more borrowers began to default on loans, and financial analysts and government regulators both worried that a growing debt bubble at the basement rungs of the Chinese economy might threaten the general stability of the country’s financial system.
In December, in an effort to mitigate systemic risk and curb consumer exploitation, state financial authorities announced rules aimed at reeling back unchecked growth in the online lending industry. Thousands of companies operating without government license were banned from lending outright. The few hundred that remained in the market — including big names in China like Quidian, PPDai, and Jianpu — became subject to tight restrictions on total lending, the customers they could lend to, and the interest rates they could charge. As a result of the regulations, many companies are expected to go out of business, and many would-be borrowers are likely to be left once again with severely limited credit options.
In a market economy where it takes money to make money, experts say access to credit is a leading factor separating the economic power of the wealthy and politically well-connected from that of those in lower strata of the Chinese system. New regulations in online lending were put in place, in part, to protect lower-income consumers — but, at a time of stark income inequality across China, they might also prove to be one more thing holding them back.
“Anytime something bad happens in the market system, there’s a sense in the government that it has to be reversed completely,” said Cheryl Xioaning Long of the Xiamen University School of Economics. “Regulations are imposed on the micro-lending industry, rather than addressing the root problem of there being no access to capital for lower members of society. There’s little thought for the idea that maybe having a loan with high interest is better than having no loan at all.”
The online micro-lending industry officially counted approximately $150 billion in activity in 2017 and has grown exponentially in recent years, amid dramatic rises in internet access and smartphone usage across China. Many borrowers in the lower and lower-middle classes, who grew accustomed to small loans as a routine part of their lives, have expressed frustration in the wake of the December regulations.
“My credit line is suddenly reset to zero?!” complained one user of the Baidu lending platform in February. “You can’t play me like this. I was paying my debts on time!”
“Is this how you treat an old customer?” said another user. “I’m only trying to buy something worth a couple hundred dollars, and you turned me down in a second. I’m without words.”
Since the micro-lending industry’s inception in China, financial experts have broadly celebrated its burgeoning diversity, as companies provided for niche needs which had long been unmet by the legacy financial system. Some companies offered small loans for healthcare, for instance, while others targeted specific groups of people, like farmers.
“Having access to loans, especially for poor, rural families has a big impact on their ability to raise incomes and pursue other opportunities,” said Alfred Park, editor-in-chief of the China Economic Review. “But people don’t always know what they’re getting into.”
Xu Xia is one borrower who has seen both the good and bad of online lending. A Shanghai-based marketing manager in her mid-20s, Xu began borrowing in college to supplement to the small living stipend she received from her parents. Xu is typical in that she initially used loans to make day-to-day ends meet: she paid for her smartphone service and cared for her cat. Always just a few clicks away from a new loan, though, Xu quickly found herself prone to overspending.
“Cash loans make you feel richer than you actually are,” Xu said. “It’s addictive. I am now owing a lot of debt.”
Xu said she is aware that new rules are making it harder for her friends to get loans. But based on her own experience with debt — today Xu spends roughly half her monthly salary just paying off old loans — she doubts if this is a bad thing.
Still, experts say negative consumer experiences are not explicit signs that an industry is broken or requires regulation. In the case of online lending, an institutionalized system of financial education might also prepare consumers to approach debt responsibly and ward off loan sharks.
Park explained that diversity and dynamism in any industry must always be balanced by prudent regulation. Because there has not been significant data kept on who specifically in China has utilized online lending — due, not incidentally, to a lack of regulation — he said it is difficult in this case to predict if the net gain of consumer protection will outweigh a loss of diversity in the market and the reality that, under new regulations, some consumers will lose access to credit.
The impact of the regulations will ultimately depend on how people were actually using small loans, according to Michael Pettis, a Carnegie Senior Fellow and professor of finance at Peking University. If more people were borrowing to invest in small businesses or jumpstart their lives, Pettis said the regulations could damage their prospects and the Chinese economy in general. If more people were borrowing for vanity purchases, on the other hand, the regulations could be helpful for China, because this sort of consumption most often leads to compounding household debt.
In any case, Pettis warned that a heavy-handed crackdown on a young lending industry could have long-term negative outcomes, given credit as a factor in China’s economic inequality.
“As long as money and economic opportunity stay at the top, where people save more than they spend, you have less money being injected into the economy,” Pettis said. “That’s when economies eventually stagnate.”
Andrew McCormick is a reporter currently studying at Columbia Journalism School. Additional reporting was provided by Chuan Tian and Haneya Hasan at Columbia Journalism School.