Where the Digital Credit Space is Headed in China

A chicken farm in Shandong province (credit: Zenan Wang)

By: Zenan Wang

Wenge Chang is a renowned crab farmer in Sihong county. His farm has bred multiple “the king of crabs”, the biggest crab of the year in national contests. Sitting in an office full of trophies, he complained to us how he struggled getting loans to expand his production. Despite a business with CNY￥200,000 to CNY￥300,000 annual revenue and an excellent credit history, Mr. Chang found that few banks would give loans to help him expand his production because he could not provide collateral. Farmland in China technically belongs to the government and farmers are only allowed to operate on the plot assigned to them. They can rent land from others if they want to expand production, but can neither sell nor use the farmland as collateral. But for Wenge Chang that’s all the valuables he’s got, a lot of land and a lot of crabs.
​
For people living in the rural part of China, getting a loan from banks is not easy.  Because of the national policy to support rural areas, big national banks are required to charge a very low interest rate for farmers. But evidently, banks do not make much profit from such low rates. As a result, it’s nearly impossible to get a loan from the four big national banks. Most of those banks do not have branches in rural areas. Even Agricultural Bank of China, one of the four banks whose mission was to support agriculture when it was established, pulled out of most rural markets.

Rural borrowers usually turn to regional commercial banks and credit unions. Those banks typically charge a competitive market interest rate, which is much higher than those charged by the national banks. But regional banks’ top priority is often lending to local private enterprises, which also have low chances of getting credit from a national bank, and are willing to pay high interest rates. In contrast, lending to small holders without collateral is extremely costly, plus charging high interest rates may be politically dangerous. As a result, it is no surprise to see that regional banks aren’t swarming to lend to small holders.

Chinese internet giants have identified this niche market and their fintech subsidiaries are racing to expand financial services in rural areas. By 2016, almost all the tech giants in China have declared that developing a rural finance service is one of their company’s long-term strategies. Despite pressure from their peer fintech companies, the competition from banks is almost non-existent. When a company manager told me that they are planning to provide a new type of loan that takes chicken coop equipment as collateral, I asked him how they are going to compete with traditional banks with this product (it seemed to me that banks should have being doing this and would have more of an advantage than this company). The company manager responded that they thought the same thing at first. But after they did their research and ironed out the details, he was very surprised at how easy it was to implement the idea and that no bank was doing it. It seemed that the traditional banks really lack an appetite for giving out small loans, he concluded.

However, the fintech companies will not be satisfied with profiting from a small niche market. They want to disrupt the entire financial industry. Managers at many fintech companies like to use buzz words such as “Big Data”, “Cloud Service” or “Artificial Intelligence” to inadvertently remind us that they are a technology company rather than simply another financial service provider. They are indeed bringing a new perspective to an old industry. During my conversation with managers of such fintech companies, it became clear that their ambition goes beyond making profit off small loans, but to make everything “digital”, which in turn could lead to more innovation. For example, a company provides production management software for free to its husbandry loan recipients, and subsidizes farmers to install smart environmental control systems that constantly transmit real-time data to farmers’ cell phones and the company’s data server. What might the company be able to do with such data, one might wonder? For one thing, this kind of production data could be used to detect fraudulent behaviors from borrowers, to provide technical support to farmers, or to design and offer actuarially fair insurance products. Data is the new gold of the fintech era, and Chinese fintech companies are already mining it.

While some companies are trying to collect enough data to generate a digital profile for everyone in the country, others are already thinking “why not get a profile for every chicken, every pig in the country as well?” The rise of financial technologies and data mining for digital financial services marks the beginning of a new era in which fintech companies could increasingly wield more and more power over consumers and their financial decisions.  

Zenan Wang is pursuing his PhD in Economics at UC Berkeley. He traveled to rural China in Summer 2017 to interview recipients of a husbandry loan product for his DCO funded study “Access to Digital Credit and Its Spillover Effects in China”.