Commentary on Political Economy

Monday, 27 July 2020


Is Alibaba Really Ready to Show China’s Subprime Books?

The IPOs of two online lending giants will reveal the credit stresses on Chinese consumers to investors. It won’t be pretty.
At first glance, the timing couldn’t be better.
At first glance, the timing couldn’t be better. Photographer: Smith Collection/Gado/Getty
The world’s largest fintech unicorns are preparing for their debutante balls. Billionaire Jack Ma’s Ant Group is seeking a valuation north of $200 billion in a landmark dual public listing in Hong Kong and Shanghai. Lufax, backed by Ping An Insurance Group Co., is going one step further, braving the U.S. Senate’s new Holding Foreign Companies Accountable Act and targeting to raise at least $3 billion in New York.
Billion-dollar initial public offerings are encouraging news for market sentiment. But we can’t help but wonder: Is this really a good time to celebrate their success, when tension between the U.S. and China is escalating into a war for capital?
At first glance, the timing couldn’t be better. China’s regulatory environment has become friendlier as Beijing, pinched by the coronavirus, loosens its purse strings. Meanwhile, stock markets are rewarding tech companies that consumers use every day. California-based PayPal Holdings Inc., for instance, has soared about 60% this year. In China, Ant Group’s ubiquitous mobile payment product, AliPay, fits the bill. Paper money is dirty in the Covid-19 era and no one wants to handle cash.
But by listing this year, Ant and Lufax run the risk of exposing how volatile and unsteady China’s financial regulations can be, potentially adding fuel to speculation that the nation’s Lehman moment is drawing nearer. Beijing first vowed to clamp down on private-sector debt in late 2017, with the People’s Bank of China pointing fingers at rising risks in asset management and internet finance. It followed with far-reaching rules for the financial industry in April 2018.
Since then, regulators have blown hot and cold on practices in the online lending industry, leading to significant uncertainty for loaning out money and the availability of consumer credit. Going public in 2020 means that Ant and Lufax will have to explain what happened to their business models in 2018 and 2019.
Both behemoths took a hit. For most of 2017, consumer micro lending was a lucrative business for Ant, accounting for almost 20% of the group’s income, Bernstein Research estimated. But that cash cow’s milk turned sour that December, when Beijing suspended all unsecured online cash loans. Ant could no longer offer asset-backed securities exceeding 2.3 times its total capital. Issuing such bonds had been a capital-efficient way for Ant to pass its loan books on to funds.
The change was painful. In the fourth quarter of 2017, Alibaba Group Holding Ltd., which has a one-third equity stake, received a payment of 193 million yuan ($27.6 million) from Ant, down from 2 billion yuan in the three months ending in September. 
Lufax, China’s largest peer-to-peer lender, also saw seismic changes. Until late 2017, the country’s online financing business was driven by P2P, with total outstanding loans peaking at 1.1 trillion yuan. Regulatory tightening practically killed this model. Nowadays, facilitation — essentially matchmaking — is the norm, with banks accounting for about 45% of online consumption loans, according to CLSA Ltd. estimates. Last July, Lufax substantially scaled back its core P2P business.
These IPOs will expose the true state of millions of consumer balance sheets. Thanks in part to the rise of companies like Ant and Lufax, Chinese are no longer debt-free. At the end of last year, household debt totaled more than 60 trillion yuan, or 62% of gross domestic product. Their ability to repay is worsening. Data from the central bank show that while consumption loans drawn from financial institutions rose over 13% in June from a year earlier, disposable incomes are shrinking, unemployment is rising, and the cash flows of borrowers are looking smaller.

Investors may find that the picture wasn’t all rosy, even before Covid-19. For instance, Qudian Inc., a smaller lender, noted that its D1 delinquency rate, a real-time representation of its portfolio asset quality, rose to 13% at the end of last year from 10% in the previous three months. Sure, financial distress at Qudian’s customers might appear minor in the bigger picture, but it could seem much less idiosyncratic when public offerings reveal such details from Ant and Lufax. They respectively account for 32% and 13% of online lending, according to CLSA. It’s not clear why Beijing would want to let these two cats out of the bag. 
The coronavirus will muddy the waters further, especially for those seeking to borrow online. Asset-backed securities sponsored by banks did better than those by finance companies, potentially reflecting the less-prime nature of the latter’s customers. A significant increase in delinquencies may leave online lenders short of capital. There will be lasting pain.
Six-year-old Ant was once known as the firm that threatened the stranglehold of China’s giant banks. One of its main offerings has been the systemically important money-market fund, Yu’e Bao, which has more than 600 million Chinese investors. Lufax had 44 million customers on its platform at the end of 2019, with 347 billion yuan of their assets under management. Its loan book stood at 462 billion yuan, up 23.3% from a year earlier. 
If the two firms had waited a few more years, they wouldn’t have to explain the awkward period of 2018 and 2019. By allowing early investors and company insiders to cash out now, Ant and Lufax will lay bare the ugly side of China’s financial industry. Foreigners will be sifting through the prospectus of each offering, wondering what China’s subprime consumers look like in the Covid-19 era – and for years to come.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

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