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China has halted all approvals for new online lending companies, sending a chill through the country’s fast-growing fintech sector, which has produced some of the biggest and most well subscribed offshore listings this year.

The regulations came from a new state body set up to regulate internet finance. The rules also forbid fresh approvals of offline microlending companies that lend across provinces.

Existing companies will be allowed to continue operating but may see their operations more heavily regulated. 

Online lenders have faced criticism for extending loans without proper due diligence, adding to China’s bad-debt troubles. Some online lenders are thinly veiled scammers, offering high interest, short-term loans to vulnerable borrowers and employing unorthodox collection methods, such as demanding nude selfie photographs, as collateral.

“[Regulators] are very scared that a lot of these firms have very little internal control and serious oversight as to who they are lending money,” said Christopher Balding, a professor at Peking University’s HSBC Business School. 

The announcement caused shares for some of China’s biggest fintech companies listed abroad to drop overnight. 

Chinese online insurer ZhongAn, which raised $1.5bn in an IPO last month in Hong Kong, dropped as much as 4.8 per cent on Wednesday. 

Online microlender Qudian, which raised $900m on the NYSE last month, saw its shares tumble as much as 16 per cent Tuesday in reaction to the news, before recovering. Ppdai, another online microlender that raised $221m on the Nasdaq earlier this month, ended Tuesday down 14 per cent. 

The share values of both Qudian and Ppdai were also hit earlier in the month by allegations they had misrepresented their business models.

Investors have shown strong interest in fintech despite Beijing’s regulation of the sector, with some of the most valuable IPOs in New York and Hong Kong this year driven by Chinese fintech. 

Over the past year, companies such as Xiangyuan Culture Group, a Shanghai-listed entertainment and leisure company, and Renhe Pharmacy Group, a Shenzhen-listed firm, announced plans to spin off an online micro-lending unit. 

China has seen its fintech sector grow rapidly as consumers increasingly turn to online platforms seeking credit. China does not have a standard credit rating system, making it difficult for borrowers and small businesses to receive loans.

About 40 per cent of consumers in China make payments online, and 14 per cent have gone on the web to borrow money, according to DBS. 

Yet fintech’s fast growth has prompted a reactionary wave from financial regulators, who have tightened scrutiny this year after a spate of fraud and financial collapses within the peer-to-peer lending space. The new oversight body includes China’s central bank and banking regulators.

“These are not companies with natural segues into the lending world so one of the natural worries is no one knows where this money is going,” said Prof Balding. 

Twitter: @emilyzfeng

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