Predatory online loans still causing trouble for young Chinese

(ATF) The Chinese government has imposed a range of measures to crack down on online lending platforms, and while these moves have hit some of the country’s biggest operators, such as Alibaba, Tencent, etc, they appear to have only been a partial success. And that may stem from the fact there are so many – with thousands of lenders said to still be active.

Beijing Evening News pointed out recently that many sites still offer payday loans to people with an average monthly salary of just 5,000 to 6,000 yuan (about US$768 to $922), who could find themselves forced to make total repayments of more than 27,000 yuan (about $4,150), because of ‘hidden’ fees and high interest rates.

The newspaper cited the case of 26-year-old Xiao Wu, who owed nearly 250,000 yuan in debt to 11 online lending platforms.

“I can’t afford it at all, it’s gone, I can only be overdue, waiting for [people from] the platform to find my door,” Xiao Wu said helplessly.

Although regulatory authorities have repeatedly issued warnings and officials requirements, a recent investigation by Xinhua, the state media giant, found that some Internet platforms still resort to various tricks to induce consumers to pay in installments or apply for small loans.

Some sites offer enticing carrots such as ‘No mortgage guarantee is required,’ and the “interest rate starting at 2 yuan per 10,000 yuan” has become the main selling point of many loan advertisements, according to recent data published by financial firm Sambla AS, which operates a loan brokerage service in Sweden, Norway, and Finland.

After applying for a loan and using it, some netizens found that the loan platform has many ways the increase interest and level of debt. In addition to interest, there are service fees and handling fees, and even if the loan is repaid before the repayment date, additional handling fees are required. The actual annualized interest rate is generally above 10%.

According to data from the central bank, as of September 30, 2020, the total amount of outstanding credit card debt for the previous six months in China had risen to 90.66 billion yuan (just under $14 billion), which was more than 10 times the figure of 10 years earlier – and those loans were just borrowing issued through formal bank channels.

Related credit card data in the “2020 China Leverage Ratio Report” released by the National Finance and Development Laboratory at the Chinese Academy of Social Sciences showed that that macro leverage ratio climbed from 246.5% at the end of 2019 to 270% in 2020.

‘Excessive consumption’

Zhang Huaqiao, chairman of the Hong Kong Manniu Investment Company, believes that a culture of excessive consumption and food consumption is not suitable for developing countries. He said the US ‘credit bubble crisis’ a decade ago was worthy of reflection to learn lessons from this kind of behaviour.

At the end of 2020, the China Banking and Insurance Regulatory Commission, in conjunction with the central bank and other departments, drafted Interim Measures for the Management of Online Microfinance Business (a draft to solicit comments), while the China Banking Regulatory Commission issued a “Reminder on the Risk of Vigilant Online Platforms Inducing Excessive Lending”.

That led to the PBOC demanding, in early January this year, that excessive marketing of financial products be strictly prohibited and the promotion of excessive debt be reversed.

Compared with traditional financial products, the biggest feature of online loan products is that they have extremely low thresholds and a simple review process. Once a user is hooked lending quotas become much more expensive, and they continue to provide incentives and temptation.

The Beijing Daily said: “There are red envelopes for opening online loans”. “There are discounts for using online loans … What is particularly noteworthy is the algorithm tracking of the platform. Many Internet platforms can use big data technology to monitor and analyse the search, consumption, and browsing records left by users on the Internet, and target marketing.”

‘Addicted to online loans’

“If you don’t have money to rent a house, you can use a rent loan. If you don’t have money to buy a mobile phone, you can make a blank note .. if you don’t have money for beauty treatments, you can pay in instalments.”

Products and services that were once out of reach have suddenly more easily to attain. And some young people have become so addicted to loans they consume “in advance”, bringing hidden dangers into their lives.

Young people have become the main targets of online lenders.

According to statistics from the Guangzhou Internet Court, nearly 60 defendants in online loan disputes are young people under the age of 35. The Beijing Second Intermediate People’s Court also revealed in a notice that the age of defendants in online loan cases was mainly between 20 and 30, and many were fresh graduates.

The paper quoted industry insiders, who believed that continuous supervision is needed to rectify the chaos created by such borrowing and consuming, to bring about better standards in the internet lending sector. And that young people need to be guided on better spending habits.

Yu Baicheng, Dean of Zero One Research Institute, believed that the government’s “Interim Measures” on the management of Online Small Loans” should be implemented as soon as possible and strictly maintained. Financial institutions must strictly review the process lending platforms, especially for those that disguise installment payments, which need to be standardised. Regulators should conduct daily random inspections and check financial institutions, he said, to check that they have strictly controlled loan default penalties.

Yang Dong, a professor at the School of Law at Renmin University of China, believed that information on various platforms is asymmetric, and it is extremely easy to generate long-term debt and bad debt risk.

Liu Qi, a judge at the Guangzhou Internet Court, said some young people are not deeply involved in the world, but lack social experience and have weak self-control. They are likely to be “trapped” by online lenders and get more and more entangled. The judge recommended that league groups, schools, and social organisations set up assistance centers to improve relief channels.

Meanwhile, Dong Ximiao, chief researcher at China Merchants Finance and a part-time researcher at Fudan University’s Institute of Finance, suggested that consumers be taught to develop good consumer habits, so that they live within their means, and don’t borrow excessively.

Professor Yang Dong suggested that commercial banks and policy banks should establish interest-free or low-interest public welfare loan service platforms to train college students to become smarter consumers and try to cultivate high-quality customers for enterprises to achieve more balanced economic and social interests.