A Turbulent Year for Chinese Fintechs
Some small- and medium-sized companies in China's financial sector have struggled to comply with stricter regulations and many have closed this year, leaving the market open for industry giants.
This year has been a tumultuous one for China's financial technology companies as they faced tough competition, regulatory challenges and market volatility. In this review, CapitalWatch is highlighting some trends of 2019 in China's fintech industry.
Large players in the sector such as Ant Financial, backed by Alibaba Group Holding Ltd. (NYSE: BABA), have expanded over the past year, benefited by international expansion and developments in private wealth management services. By contrast, some small- and medium-sized companies with fewer resources struggled to comply with stricter regulation, with many facing bankruptcies. The lending market in China, previously unregulated and scattered, has been ridden with scandals, which led the authorities to increase their oversight over the past few years.
Meanwhile, macro headwinds weighed on the sector's performance, making 2019 an uneasy year. They were Sino-U.S. trade tensions, China's economic slowdown and the ongoing political protests in Hong Kong. At the same time, China has taken steps to open up its financial markets to foreign institutions in a move the country said has long been in the making.
Fintech Industry Home to Penny Stocks
A number of China fintech stocks witnessed a decline to the level of "penny stocks" by the end of 2019, trading at below $5 apiece. And while they struggled with stricter regulations in Beijing, some struggled to remain compliant with the listing requirements of the capital markets in New York.
Peer-to-peer lending platforms Hexindai Inc. (Nasdaq: HX), FinVolution Group (NYSE: FINV) and Weidai Ltd. (NYSE: WEI) closed on Christmas Eve at 92 cents, $2.25 and $3.03 per American depositary share, respectively.
The stock of 360 Finance Inc. (Nasdaq: QFIN) has been trading down 40% from its debut a year ago after the resignation of its CEO and lawsuits. On Tuesday before holiday closure, QFIN closed at $9.51 per ADS compared with its IPO level of $16.50 in December 2018.
Another company, once a large peer-to-peer lender in Hebei province, recently closed, rattled by allegations. In early December, Yonghui Li, the chairman and chief executive of U.S.-listed Fincera Inc. (OTC: YUANF), was detained by the local government for suspected financial fraud.
China Rapid Finance Ltd. (NYSE: XRF) struggled to maintain listing requirements this year and has been transitioning to a microcredit business. Shares in China Rapid closed at $1.83 apiece on Tuesday, though they were propped after-hours on news of an $8 million investment in the platform.
Shifting Away From P2P Lending
Uncovered Ponzi schemes and a flood of fraudulent deals in the peer-to-peer lending sector have led China regulators to tighten the oversight. Last year, Beijing implemented a policy of three downs, seeking to diminish the number of lending institutions, the volume of loans and the number of borrowers. Earlier this year, the People's Bank of China required P2P lenders to report borrowers' and operations data to credit reference agencies it controls.
Many lenders have been transitioning to institutionally-funded loans and diversifying their portfolio of services overseas.
9F Inc. (Nasdaq: JFU), which became publicly traded in the U.S. this year, said the regulatory changes will positively affect the industry and lead to "healthy development." The company has witnessed a decrease in its loan origination volume this year as it transitioned to comply with the new market conditions.
FinVolution, formerly known as PPDAI, also said in August that it turned to institutional funding. 360 Finance said it relies mainly on institutional funding to facilitate loans, with the percentage of funding from financial institutions at 85%.
Overseas growth has been viewed as another solution to stay afloat. 360 Finance said in August that it is exploring markets in Southeast Asia and South Asia. 9F, meanwhile, teamed up with Huawei Cloud overseas. "Southeast Asia has relatively large growth potential," Yanjun Lin, 9F's chief financial officer, told CapitalWatch.
Fintechs Forge Cross-border Partnerships Despite Tensions
Last month, a group of U.S. senators led by Marco Rubio and Jeanne Shaheen introduced a ban on large U.S. federal pension funds from investing in China-based companies.
The Thrift Savings Plan retirement fund with $599.5 billion under management said that emerging market stocks have outperformed developed markets in recent years if using the MSCI All Country World ex-U.S. Investable Market Index as the benchmark.
"This is the legal preparation for the potential dispute between the U.S. and China in the near future when the two sides may tear their faces, directly punish and even delist Chinese companies," Xu Wu, an associate professor at Arizona State University, told CapitalWatch about the move.
MSCI CEO Henry Fernandez said in October that limiting capital flow to China would have a "devastating impact on global markets."
Despite the ongoing tensions, some U.S. and China companies continue to push for joint development. U.S. giant Vanguard reportedly increased its backing of a number of China youth-focused tech firms in the third quarter, allocating approximately $1.3 billion to Alibaba Group Holding Ltd. (NYSE: BABA). The asset manager also announced in December it will launch a joint venture with Ant Financial Services Group, aiming to offer wealth management services to Chinese individual investors.
"Generally, Ant Financial is dedicated to using technologies to empower us and our ecosystem partners to bring more inclusive financial services to individuals and small and micro-businesses. We are always open to cooperation in line with our mission," an Ant Financial spokesperson told CapitalWatch on Tuesday.
In another example, U.S. giant PayPal recently acquired 70% equity interest in Chinese payment services provider GoPay, thus becoming the first overseas mobile payment company to be licensed in China.
While the phase-one trade deal between Beijing and Washington may mark the high point of the talks, as CW columnist Mark Melnicoe wrote in his commentary on Saturday, we are left looking forward to 2020 expecting many more cross-border deals.