The Never Ending Cash Loan Battle in China

Written by Felix Yang || 05 Dec 2018

At the end of 2017, regulations tightened around the cash loan industry in China and locked 36% as the highest APR lenders can collect on any loans. One year later, although many platforms have disappeared, others have transformed and are back at the forefront of lending in China.

Before the 2017 regulation came out, many small cash loan platforms were lending on a very short-term (a few days) with a very high-interest rate (500%+ annual). The default rate was 30% at that time, which is high, but given the interest rate, still immensely profitable. 

However, since the 36% limit was implemented, the platforms have been forced to change. Some of them became “loan supermarkets,” selling loan products for other platforms. Some decided to move their cash loan business to Southeast Asia. A few more switched to other fintech related businesses.

While most of the platforms looked for legal alternatives, there are also players, old and new, that tried to continue the illegal usury business underground. Some of the platforms charge around 30% for one week's borrowing. For example, to borrow RMB1,000, the borrower would only receive RMB700-800 in cash, although still be responsible for paying back the full 1,000 of course. The business model is simple, or “naked” insofar that there is no risk control system. Lenders bet on a reasonable amount of customers paying back their loan, while the unpaid debt is passed on to collection companies who often use non-stop harassment techniques to get the borrower to pay.

The Chinese government will crack down on the illegal platforms, however, there have been other ways to get around the government’s supervision. One example is called “Mobile Repo.” These cash loan apps can identify the user’s mobile phone model. Then the user/borrower can “pledge” his/her phone to the platform at a prescribed value, which is typically the amount the user wants to borrow. After uploading some basic information, the user will receive the loan dispersement. During the whole process, the user holds his/her mobile all the time, and the ownership of the phone is only 'nominally' transferred to the platform.

Unsurprisingly, after running for a couple of months, the "Mobile Repo" model has also been halted by the government.

However, as there are borrowers who are desperate for money in China, new, more elaborate methods have developed. One of them is called a “market of installment.” The borrower will set up an online shop, for example, selling tea. The lender would then go online and purchase the “tea,” effectively providing the “loan.” The seller would never actually send the tea, but after some time, equal to the agreed borrowing period, the lender would ask for a refund and should get the loan back. The interest of the loan is arranged by the discount at the beginning or other digital assets during the process.

Lenders in China are inventive and the increased borrowing demand, coupled with an increased supply of investor money means that there will always be 'unique' cash loan business models that arise. This battle between cash loan platforms and supervisors is far from over and will continue to be a game of cat and mouse.

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