Is Fintech in China Red Hot or Cooling?

 Credit / Attribution - Print © Can Stock Photo Inc. / chungkingIt would seem that numbers are making Shanghai the new world capital of fintech.

One number is 1.3 billion, which is the population of China. Another number is $2.4 billion, which is the amount of funding that poured into China’s fintech sector in the first quarter.

But a closer look reveals some cracks in the facade. While China accounted for nearly half the total $4.9 billion of fintech funding in the quarter, it accounted for only a tiny sliver of the deals — 9 out of the 215, according to data from KPMG.

In 2015, $2.7 billion went toward 26 deals in China, meaning that China is seeing less fintech capital and fewer fintech deals this year than last.

China still offers plenty of opportunities to entrepreneurs. Today, just 300 million people in China have a credit history, yet this is nearly the population of the United States. The other 1 billion don’t. In short, there is a massive addressable market in China, both among the banked and unbanked population. And there is a raft of fintech ventures aiming to serve that untapped market.

Jason Jones, co-founder and CEO of the Cardinal Rose Group, which owns the LendIt conference, Lend Academy Media, and an investment arm called NSR Invest, noted that digital banking is already massive in China, and is set to get even larger. The large tech companies in China — Alibaba/Ant Financial, Tencent, Baidu, and the like — have strong mobile-centric brands, and enjoy consumers’ trust, and they all offer financial services in one from or other, primarily centered around payments.

The lending market in China is also growing rapidly, even as credit reporting is sporadic and inconsistent, which makes underwriting a challenge. But the demand for credit is growing, and marketplace lenders are springing up to fill it. Zane Wang, CEO of China Rapid Finance, told Bank Innovation last year that China had 800 million financially active customers, and just 300 million of them had access to credit. The other 500 million pay utility and mobile bills, enabling underwriting.

The investment money pouring into China is focused on this lending market. China also leads the world in bitcoin trading, as a look at vividly illustrates.

Jones noted that marketplace lenders in China deliver yields of 8%-12% to investors. While Chinese originators are beginning to offer transparent provisional funds similar to the UK model, a large number still guarantee returns and make money on the spread by lending to borrowers at rates up to 40% or higher. For those originators making increasingly risky guaranteed loans, they are “setting up for failure,” Jones said.

So let’s hold off on that fintech crown — for now.

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