Chinese economy: Beijing’s war on the credit boom

Like many small businesses across China, Zheng Weijun’s freight company had struggled to obtain credit from the state-dominated banking system. But in 2018 the 12-lorry business discovered Fincera, a peer-to-peer platform in Hebei province that collected money from retail investors starved of returns and channelled it to borrowers, mainly small trucking and logistics companies.

“We qualified for a Rmb200,000 [$31,000] loan and used it to expand the business,” Zheng says, adding that Fincera charged his company 9 per cent interest annually. “The traditional financial system does not reach down to us.”

Just a year later, however, the credit dried up after Hebei police accused Fincera of “illegal fundraising” — something it denies. “The government shut it down and offers no alternative,” Zheng complains, adding that his company’s recent loan applications have been rejected by state banks. “How are we to judge whether a [P2P] platform is good or bad? We only care that Fincera was willing to offer us a loan.”

Fincera’s founder and chair, Li Yonghui, was detained by police in December 2019 and is awaiting trial. The platform’s operations — it had Rmb9bn under management — are now in limbo, with investors unable to get their money back and borrowers unsure of how to repay their loans.

A former Fincera employee, who asked not to be named, argues that “there were no issues” at a platform that was delivering credit to a neglected sector of the Chinese economy. “They completely shut down the business anyway,” he says. “Accounts and systems were frozen, no one could manage anything. The police just took control and asked borrowers to pay the money back, but they are not going to be able to devote much manpower to that.”

Fincera, its clients and investors are collateral damage in a wide-ranging crackdown on financial risk waged by President Xi Jinping and vice-premier Liu He, the Chinese Communist party’s most powerful financial official, for the past five years. While the US is pledging to “go big” as its economy comes out of the pandemic crisis, China’s leaders are focused on the threat of excessive risk-taking in the financial system.

The campaign initially focused on P2P platforms and other components of China’s once rampant shadow banking sector — the off-balance sheet activities that financial institutions used to funnel credit to borrowers, especially those in the private sector who found it difficult to borrow directly from banks. It has since been extended to internet finance and property.

Some analysts warn that in curbing the credit-fuelled excesses of the past decade, Xi and Liu risk an overcorrection that could stifle innovative areas of financial activity and, ultimately, economic growth. From 2016 to 2019, the average annual increase in China’s corporate bankruptcies exceeded 30 per cent.