Lufax’s listing plan derailed by regulators’ industry crackdown
Ping An Insurance’s Hong Kong-listed shares began their upward revaluation in 2017, when investors started to view the Shenzhen-based conglomerate more as a tech player than purely as a traditional financial services provider. That perception change has much to do with the various tech unicorns it has incubated. And straddling both the tech and financial worlds is Ping An’s Lufax, an online peer-to-peer (P2P) lending platform that promised to deliver a lucrative initial public offering.
Lufax’s listing plan has been the subject of news headlines stretching back a couple of years. In January last year, for example, Reuters reported that Lufax was planning a Hong Kong debut that would value the eight year-old firm at $60 billion. This didn’t happen and the IPO could now be shelved, according to Mergermarket, because Lufax has been unable so far to obtain a licence from the Chinese government for its P2P operation (no such licence has been issued to any applicant yet). Mergermarket said Ping An will instead spend up to $12 billion buying back shares in Lufax (its currently owns 41%).
Ping An has denied the report, saying that it has no plans to buy back Lufax’s shares, and that it does not have any material information undisclosed.
Nevertheless the news has put China’s ongoing clampdown on its P2P sector under the spotlight. Playing the middleman role between retail investors and small companies, P2P lending was once considered an integral part of China’s financial system, filling the gap left by big commercial banks that prefer to lend to state-owned entities.
But a flurry of scandals and defaults, and the resultant loss of savings of hundreds of thousands of mom-and-pop investors, led regulators to introduce more stringent oversight into the shadow-banking sector and, subsequently, to the mass closures of P2P platforms that failed to comply.
Approximately 5,700 platforms had already been suspended as of May, with 914 still in operation, according to industry data provider Wangdaizijia. Total P2P loans also shrank 30% on the year to around Rmb700 billion ($102 billion).
Some major platforms were closed including Dongguan-based Tuandai.com, which was accused of designing and selling fake financial products. Its bankruptcy in March prompted thousands of protesters to take to the streets and demand their life savings back. Tencent-backed social e-commerce platform Mogujie (often dubbed China’s Pinterest) also shut down its P2P platform Zhongdoubao in March due to the need to “ensure the security of funds”.
With a trial registration process set to be launched during the second half of this year, more P2P lenders are expected to fail, Economic Information Daily reported. The programme will enforce a tougher registration threshold and require all operators to set aside general risk reserves and loan loss provisions.
More precisely, nationwide platforms will have to hold “general risk reserves” that represent 3% of their loans, and 6% of each borrowing as an impairment provision; whereas the ratios for regional platforms will be 1% and 3% respectively. There will also be caps on the amounts that individuals can invest. The upshot: the surviving platforms will face substantial capital pressure and will need to approach institutional investors for funds.
Shanghai-based Dianrong, for instance, told the Financial Times that it needs to raise $100 million to weather the regulatory clampdown as it awaits accreditation from Beijing. Once a poster child of China’s P2P business, Dianrong is shutting down 60 of its 90 offline stores and dismissing up to 2,000 employees, or a third of its staff.
The massive shakeout could weed out the bad actors and defuse systemic financial risks in the long run. Yet it has also left many small and medium-sized enterprises (SMEs) in the lurch – shut out as they are from the formal banking sector due to their less attractive risk profiles. And that has grave implications for a slowing Chinese economy, as SMEs account for roughly 60% of gross domestic product and above 80% of employment.
Since last year the central government has been calling for the country’s biggest state-owned lenders to funnel more capital to SMEs. In March Chinese Premier Li Keqiang specifically urged a 30% increase in loans to SMEs this year – to offset economic pressure from the country’s escalating trade dispute with the US. As an incentive the big banks were able to reduce their reserve ratios, which unlocked more liquidity in the banking system. The total outstanding loans to SMEs for the big five banks has since increased to Rmb1.99 trillion as of March, up 17% from the end of 2018.
Early this month the People’s Bank of China expanded the types of guarantees eligible for its medium-term lending facility in a further bid to direct more liquidity to SMEs. The State Council also said it would have greater tolerance for bad debts on SMEs loans, allowing non-performing loan ratios to be three percentage points higher than other types of lending.
These measures will be increasingly supported by the credit scoring system that the central government is building to match banks with SMEs of higher creditworthiness. The scores will take into consideration a plethora of information, not just on the companies but also the individuals that own or run them. The data will include tax payments, utility bills and whether the principals are present on any government blacklists. So far 400,000 companies are on the database, according to the National Development and Reform Commission (NDRC).
It remains to be seen whether these measures will be enough to plug the demand gap left by the P2P pullback. The hobbling of the P2P sector is part of the Chinese government’s effort to rein in shadow banking – which is also putting under pressure smaller and regional banks which have seen rising bad debts.
As we reported in WiC454 the central bank recently took over Baoshang Bank, a smaller lender based in Inner Mongolia. That was the first “bankruptcy liquidation” of a lender in China since 1998, when Hainan Development Bank was taken over by the central bank, according to a Sina Finance op-ed. The bailout late last month saw the financial regulators guarantee all bank deposits below Rmb50 million to stem a bank run. Baoshang’s outstanding loans stood at Rmb145 billion with the authorities saying it posed no systemic risk.
However, the news that a bank with 291 branches had been ‘liquidated’ soon had investors questioning which smaller institution might be next. Similar to Baoshang at least 18 other regional lenders have also failed to produce audited 2018 financial results. Their combined loan books are worth Rmb4.47 trillion. The Financial Times calls this a “blind spot” in the Chinese banking system.
Dong Ximiao, a professor of Renmin University, told the FT that some of the reasons given for not releasing 2018 financials were worrying. Bank of Jinzhou, for instance, said in a regulatory filing in late May that its 2018 results were not available because its auditor had resigned on concerns that some of the bank’s loans had not been used for their stated purpose.
“The banks that have not reported represent a fraction of China’s banking system,” the FT noted, but cautioned that Baoshang’s case “revealed how troubles at a small bank can send a shock through the market”. The People’s Bank of China was forced to release Rmb430 billion in liquidity in the week after the takeover.
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