Giving credit where due can help cut systemic risks in China

By Li Qiaoyi Source:Global Times Published: 2018/3/8 21:58:40

Illustration: Luo Xuan/GT


A critical gap in China's financial landscape, which is being transformed by the internet, is set to be filled with the central bank's recent issue of the nation's first personal credit-scoring license.

The three-year license, granted to Baihang Credit Scoring - a credit reference firm backed by internet behemoths Alibaba and Tencent, among others - could provide an additional safety net for China's financial system, although it's far from a perfect fix for the runaway growth of the country's fintech sector.

It could also be a case where China can learn from the US, which has the world's most sophisticated consumer credit rating infrastructure.

In an announcement in late February, the People's Bank of China (PBC), the country's central bank, gave the green light to the credit-scoring firm, whose operations are intended to supplement the nation's centralized credit-scoring system established by the PBC.

The National Internet Finance Association of China (NIFA) is Baihang's largest shareholder, holding a 36 percent stake, while eight credit firms including Alibaba affiliate Ant Financial's Sesame Credit and Tencent Credit have 8 percent each. The personal credit reference consortium, with registered capital of 1 billion yuan ($157.66 million), is widely expected to put the country on the path to a more secure financial future.

The PBC's credit-scoring system has woven a wide-reaching safety net around the country's financial space. Traditional commercial banks as well as online lenders can use the system to help make lending decisions. They can also offer financing to creditworthy borrowers through the system.

Nonetheless, the centralized system, which in theory is supposed to be comprehensive, actually has serious limitations. It's mostly limited to commercial banks' credit and loan records, so it doesn't reflect the new world of online finance that is beyond the reach of traditional banks.

As of the end of 2014, the corporate channel of the credit-scoring system had created files for 19.69 million enterprises and other organizations while the personal channel had created files for 857 million people, according to PBC statistics.

There were 10.1 million companies with a credit history and more than 350 million individuals.

The numbers are impressive in absolute terms, but they also show that most Chinese people don't have any credit history, at least according to the PBC system, which collects information about personal loans, credit cards, personal contributions to housing provident funds, vehicle transactions and the use of vehicles as collateral for loans, among others.

The system fails to record the vibrant world of online lending activities that give internet finance platforms a growing edge over traditional financial institutions on the consumer loan front.

With internet leviathans, notably Alibaba and Tencent, having secured a head start in the marketplace for mobile payments and other innovative financial services, the value of internet-based informal loans, as opposed to formal loans extended by banks, has grown larger.

Records of such informal loans, a key component of the competitiveness of different internet finance platforms, are maintained separately by the platform operators, inevitably leaving huge loopholes for individuals to borrow simultaneously from many different lenders.

With the first non-State credit bureau operating, the potential hazards of online lending can be reduced and systemic financial risks curtailed.

That said, the PBC's decision to issue the first personal credit-scoring license to a consortium of credit firms and the government-backed, self-regulatory NIFA - rather than any individual provider - highlights concerns that efforts to improve China's credit-scoring framework might lead to intrusive surveillance that could be taken advantage of by designated credit companies.

In 2015, the PBC handpicked eight companies including Sesame Credit and Tencent Credit for pilot programs to provide credit-scoring services using various social data. The green light given to Baihang apparently signals a modification of the initial plan, as the third-party credit-scoring service providers failed to offer sufficient protection of users' privacy.

Consider a controversy sparked by Sesame Credit at the beginning of the year when the Ant Financial-operated credit-scoring system was hit by allegations of privacy violation. In annual bills that Alibaba's payment wallet Alipay sent to its users, an option that authorizes Sesame to collect user information appeared to be deliberately set as the default.

Sesame Credit apologized and quickly deleted the default opt-in. But the snafu cast a shadow over credit reference firms being offered licenses for personal credit-scoring services.

The central bank hasn't said if or when it will issue more licenses. Yet it's an important issue, because the new credit bureau, although seemingly evenly distributed in terms of shareholding structure, is far from a perfect solution to the nation's credit-scoring woes.

Allowing the likes of Sesame Credit and Tencent Credit to join a credit reference firm in which they only have an 8 percent stake each doesn't seem enticing enough to gain their full involvement in contributing to the personal credit bureau.

It might be advisable for China to draw lessons from the US, where a variety of credit bureaus, notably the big three - Equifax, Experian and TransUnion - and the availability of the Fair Credit Reporting Act make the credit-rating industry really market-oriented and effective.

It is anticipated that more details will follow on a reasonable distribution of the proceeds from Baihang's credit-scoring services that will best incentivize each of the eight firms. The authorities should also consider rules requiring all businesses dabbling in online financial services to file relevant lending data with the system.

It also makes sense for China to pursue legislation covering the credit service providers and all financial entities that are supposed to be part of the system. Fraud or abuse of the personal credit-scoring system must be penalized to ensure that the system itself doesn't become a new hazard for the Chinese economy.

The author is a reporter with the Global Times.

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