Breakingviews – China creates a bigger consumer credit mess

HONG KONG (Reuters Breakingviews) – Beijing urgently needs a system to measure individual default risk. Given thin credit histories at banks, it wants financial technology giants to hand over valuable data troves to state-run firms in exchange for minority stakes. Ant and peers have reason to resist.

In most developed countries, credit scorers like Equifax can access plentiful data from public bankruptcy records and credit-card issuers. Personal bankruptcy laws don’t exist in China, however, and card penetration remains relatively low. That leaves traditional lenders limited tools to assess individual default risk. The People’s Bank of China is nervous: between 2014 and 2019, Chinese households added $4.6 trillion in debt, according to Rhodium Group estimates – comparable to the run-up in U.S. personal credit prior to the global financial crisis.

One solution has emerged from the e-commerce sector, where companies were able to analyse consumer spending habits. Ant, a digital payments unit spun out of online shopping giant Alibaba, says it uses customer insights and proprietary algorithms to make small loans and match users to other lenders. That generated 29 billion yuan in fees, or 40% of its revenue, in the first six months of 2020.

Officials, though, have blocked Ant’s plan to start a credit scoring service, and draft rules require credit scorers to get permission before accessing payment and shopping histories. Instead, three state-led entities have been created: the Credit Reference Center, launched by PBOC mostly to collate data from banks, and two public-private ventures, Baihang and Pudao, in which major e-commerce and fintech companies have been given equity stakes.

Regulators might force online outfits to hand records over to these agencies, Reuters reported earlier this month. The big competitors appear sensibly reluctant. Ant and Tencent only own 8% each in Baihang, but they have far more data than other stakeholders. Nor is it clear whether Baihang will prioritise profit or public good. For Ant’s shareholders, still smarting from the suspension of its $37 billion initial public offering, the nightmare is that algorithms and intellectual assets get redistributed to state lenders for little return. That would deter private investment in the space.

For Beijing, there is a simpler way to get the data: don’t take it, buy it.