Gu Zeyu’s financial situation hit rock bottom in March. Out of work and owed back pay, the 24-year-old was down to eating one meal a day and struggling to cover her utility bills. But even as she cut her spending to almost nothing, her costs were still overwhelming. 

Gu had started borrowing money through Huabei, a popular virtual credit card and microlending service operated by Ant Group, the Chinese financial technology giant, while she was in college. She later signed up for Jiebei and Baitiao, two similar services. Over the next four years, her credit limit which started at around $750, was gradually raised by between $75 and $150 a month. Before she realized it, she had accumulated $4,500 (30,000 yuan) of debt. 

“Now, it’s like I’m in a whirlpool,” Gu tells Rest of World. “I can only pay it back slowly, one small sum at a time, and after that, I will have no savings. So the whirlpool makes me keep borrowing more and more.”

Gu’s situation is far from unique. As the Chinese middle class has grown in step with the economy over the past decade, financial technology has allowed hundreds of millions of consumers to borrow money to fuel their spending. Several of these platforms integrate seamlessly into payment and e-commerce platforms, allowing debt to be accumulated almost invisibly. With these services buoying consumer spending, regulators have largely taken a hands-off approach, rarely intervening in the market. But, with the economy slowing down because of the novel coronavirus pandemic, they have become increasingly concerned that the microlending industry could now pose a real risk to the Chinese financial system, should borrowers like Gu start to default en masse.

“These platforms have been really good at democratizing access to financial products and services,” says Zennon Kapron, founder of fintech consultancy Kapronasia. “So on one side, it’s been really good. But on the flip side, it is kind of risky as well.”

In November, these concerns contributed to the 11th-hour suspension of what would have been the world’s largest stock market listing: the $37 billion IPO of Ant Group in Hong Kong and Shanghai. 

Ant Group, which began as a payment service for the e-commerce platform Alibaba, was a pioneer in the Chinese microlending sector, launching Huabei in 2014 as a way to offer online shoppers access to credit, although it is far from the only player. Hundreds of fintech apps and services are available to Chinese consumers, typically allowing small-scale loans of a few hundred dollars that can be approved and paid in minutes.

Initially, the fintech companies lent their own money, but over the past few years, many have pivoted away from being direct providers of financial products and instead have become platforms for traditional banks and fund managers. Rather than issuing loans to consumers themselves, the fintechs act as brokers, using their own comprehensive internal data to assess a customer’s credit risk, then passing that information on to a bank, which underwrites the loan.

Ant’s IPO filings show that this business, which it calls CreditTech, grew 59% in the first six months of 2020 and now makes up nearly 40% of its total revenues. 

This arrangement gave banks access to customers who would previously have been uneconomical to service, customers access to bank loans, and the authorities some assurance that the stable and highly regulated banking sector was involved in the process. 

It came as a surprise to some analysts — and fintech companies — when the Chinese government’s new draft fintech regulations, released in November, reversed course. The rules call for fintech companies to originate at least 30% of the loans that go through their platforms, which had previously been less than 5%. To meet that requirement and keep up its current rates of lending, Ant Group would need to find billions of dollars to hold as capital reserves. Its profit margins — the company made $2.6 billion in profit last year — would inevitably narrow. 

Several analysts and investors who spoke to Rest of World believe that the numbers revealed by Ant Group’s IPO filing woke regulators up to the extent to which the company has been able to profit from lending out other institutions’ money.

“What changed is that the prospectus highlighted the margins,” says Daniel Broby, director of the Centre for Financial Regulation and Innovation at Strathclyde University. “This is a really impressive company, and you look to see how much money it’s making … and how it’s not sharing the risk of credit issuance, someone, somewhere, clicked.”

There were other factors in the pulling of Ant’s IPO — not least, an argument between the company’s high-profile founder, Jack Ma, and the regulators. On October 24, at the Bund Summit, an eminent finance forum, Ma publicly complained that regulation would stifle innovation. Many analysts see a direct link between Ma’s implicit criticism of the government and state-backed banks — which he accused of having a “pawnshop mentality” — and the decision to halt the listing. The Wall Street Journal reported that Chinese President Xi Jinping personally ordered the halt. However, the concerns over financial and social stability are also real.

Wang He/Getty Images

According to Reuters, a state-compiled report on how Ant Group’s microlending products have encouraged poor people to build up debt was also a factor in suspending the company’s IPO.

Alongside giants like Ant, there are hundreds of other companies — most of them small, and some of them unscrupulous. Some critics of the industry say that the legitimate lenders and the predatory ones feed off one another. 

“Because it doesn’t need to meet strict financial requirements, online microlending has evolved into more like a Ponzi scheme,” Shen Yan, an economics professor at Peking University’s National School of Development, tells Rest of World. “For some companies, the ‘better clients’ in their eyes are those who can’t stop borrowing money.”

Li Xiaodong, a 28-year-old in Shanghai, has fallen prey to these lenders. He took his first loan in 2015 from Ant Group’s MYbank lending product to pay rent and start an online store. The business failed, and to pay back the loans, he borrowed more. Today, he owes nearly $59,000 to 13 fintech companies, most backed by Chinese tech giants but some by small, shady businesses. When he was late with payments, some fintech companies publicly shamed him by bombarding Li and his friends, family, and colleagues with calls and text messages asking for money.

“Most people don’t bother to calculate the interest. They just see the advertisement and think, ‘Oh it doesn’t cost much.’” says Li. “People like me, who are bad with numbers, can never understand it.”

The same regulations that hit Ant will also target these smaller players. Under the proposed rules, if a company wants to provide microlending products in more than one of China’s provinces, it will need to have registered capital of more than $750 million. Currently, only five companies nationwide have met this threshold, including one owned by Ant Group. 

The rules will also force the remaining fintechs to be more prudent when lending, says Shen. “If they operate in a regulated way, they naturally won’t lend to those who shouldn’t be borrowing, because that is a risk, and a risk needs to be covered,” she says. “Your registered capital is here to offset the risks, meaning you will lose your own cash if the borrowers fail to pay you back.”

For those still in the grip of debt, news of stricter regulation was welcome, if a little too late. “The online lenders today have gone down the wrong path,” Li Xiaodong says. “They don’t care at all whether lending you the money is a good thing or bad thing for you. To have the state regulate, that would be good.”