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Fintech is stimulating Chinese consumption and capital flow

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Chinese policymakers are encouraging consumption, and fintech companies are spurring purchases and investments, ranging from daily necessities to international real estate deals.

Jing Zhou, CEO of Dumiao, a digital lender, said, “China is experiencing a huge mobile revolution where everybody does everything on mobile.”

Founded in 2015, Dumiao aggregates reams of data to create real-time credit scorecards on prospective borrowers at the point-of-sale, eliminating paperwork and human underwriters. After pressing a few buttons on an app or WeChat portal, approved applicants receive credit within mere minutes, not days or weeks.

“Sounds simple, but underneath it all is a huge data warehouse,” Zhou said, speaking in the company’s Beijing headquarters, which resembles less a traditional financial institution and more a tech startup with its exposed building materials and neon light.

Borrowers buy daily necessities, phones, electronics, travel packages and other goods and services. In China, mothers and newborns commonly stay in afterbirth centers where chefs, therapists and nannies help them recover. The monthly expense can reach US$27,000. Meals alone cost RMB 20,000 (US $2,900) and Dumiao credit can cover it.

With applicant authorization, Dumiao collates data from 40 independent sources, including e-commerce sites, phone carriers, transportation services, online travel agencies, credit card bureaus and blacklists. Dumiao maintains various risk, quantitative, utilization, collection and account management models. “It requires a lot of underlying infrastructure,” Zhou said. “That user interface requires a lot of development, maintenance and improvement.”

With information on 20 million prospective borrowers across 300 cities, Dumiao processes approximately one million applications per month. “Our new customer base is growing so fast,” Zhou said. Dumiao offers SME (small- and medium-sized enterprises) loans, but most customers are 20-something male college graduates who have credit cards, but insufficient lines. They borrow between RMB 100 (US $14.50) and RMB 200,000 (US $29,000).

Zhou was born and raised in Shanghai, but attended high school in the U.S. She studied engineering at Virginia Tech before spending more than 15 years at banks in the U.S. and China. Although successful at those, she saw fintech advantages and pivoted. Traditional lenders require costly head counts and physical branch offices, but with Dumiao, “there’s no human touch in the entire process. It’s very scalable,” Zhou said. “If our volume doubles today, I just need to increase my network bandwidth and IT resources… Traditionally, you need an army of people.”

Owing to expensive overhead costs, traditional lenders focus on higher-value loans. Dumiao’s customer acquisition and marginal operating costs are almost zero, so they can focus on the mass market, not niches. “If the customer has needs, if there’s a partnership that we need to work on to have this product, we can work with them.” Dumiao works with various lending sources, including an affiliated P2P platform and traditional institutions (including banks and consumer finance companies).

Central to Dumiao’s process are risk controls — verifying a customer’s identity, credit history, income and ability to repay. “All these still hold, except that in the past we asked the customer and the sales people to collect and validate that information and have manual underwriting to validate them,” Zhou said. “Today, we collect these information digitally and then we’ll cross-check them.”

Digital traces enable additional checks. When applicants key-in information, “if it’s really slow or they repeat it many times, something’s fishy,” Zhou said. And between 12:00 midnight and 6:00 am, when attempted fraud rises, “we’ll normally be more cautious during that time… As a lender you always want to make sure that the speed of growth is actually safe.”

China’s big enough for us. Just make sure that we do well here and then we can expand.
— Jing Zhou, Dumiao

As a startup, there are challenges. “I sit with the IT guys. We resolve a lot of issues every day,” Zhou remarked. “We still have a lot of things to do.”

And although the process could be replicated internationally, Zhou is focused domestically. “China’s big enough for us. Just make sure that we do well here and then we can expand,” she said. She does see this model being applied elsewhere, though. “Not just in China, but worldwide. Because it’s much more effective… The trend itself is not reversible. I truly believe this model will be the lending model in the future. It’s not just for small-ticket-size consumer lending, point-of-sales, it’s for SME lending. Any type of lending in the future should be this way.”

Fintech is enabling larger purchases. Chinese invest feverishly in real estate, but a financing gap exists. Shenzhen-based Touchouwang, a financial investment platform, aims to remedy this. It facilitates transactions by taking illiquid real estate properties and leases and converting them into tradeable, investable securities.

“The internet finance industry is central to meeting buyers’ demand and investment management demand,” said Touchouwang’s CEO, Fan Xu, in Mandarin.

Fan, who spent a decade working in the investment trust industry before co-founding Touchouwang in 2015, is bullish for multiple reasons. “Because of our urbanization, investing in unoccupied real estate is very exciting,” he said. And although many Chinese people have migrated to cities, demand should persist because the country is still under-urbanized relative to other countries. Another positive trend is demand from investors desiring higher interest rates, ranging from individual hobbyists to professional financial institutions.

As opposed to offering investments in China’s primary real estate market, such as new property developments, Touchouwang focuses on the inefficient, less mature secondary market. For example, after landlords acquire new real estate projects, their excess space such as an office floor or apartment can be securitized through Touchouwang’s online platform, reducing vacancy duration.

Fan acknowledged challenges, though. “Everybody knows P2P, but not everyone recognizes other financial investment methods,” he said. “That is the biggest challenge and will require educating and training customers.” Additionally, government policies are not a concern today, but could be as fintech faces greater regulatory scrutiny.

The biggest opportunity is that China’s real estate investment market will continue to become more mature.
— Fan Xu, Touchouwang

Competition is another issue. According to reports, established Chinese developers, including Greenland Hong Kong Holdings Ltd., Country Garden Holdings Co., China Evergrande Group and China Oceanwide Holdings Co., are offering fintech products directly to retail real estate investors.

Although there are challenges, Fan is optimistic about China’s continued development. “The biggest opportunity is that China’s real estate investment market will continue to become more mature and more customers will recognize this opportunity to invest in unoccupied real estate,” he said.

Although Touchouwang is geared toward the domestic market, Beijing-based Uoolu looks beyond Chinese borders. The company helps consumers acquire cross-border residences, apartments, developmental properties and other real estate-associated financial products. The company’s CEO and co-founder, Huang Xiao Dan, is “extremely bullish on this market.”

Through its online platform and international partnerships with banks and builders, Uoolu introduces Chinese buyers to foreign real estate deals and financing solutions across Australia, Japan, Europe and the U.S. Transactions are commonly in the RMB 500,000-2 million range (US $73,000-$290,000), but can reach RMB 20 million (US $2.9 million).

Some investors want rental income in stable high-demand markets. Other users are retirees, exchange students or travelers looking for second properties around universities and tourist areas. About half of the capital flows to the U.S. San Francisco, Los Angles, New York City, Boston and New Jersey “are all hot” markets, Huang said. According to reports, between April, 2015 and March, 2016, Chinese parties bought 29,000 homes in the U.S. worth US $27 billion.

Historically, Chinese buyers needed an internationally based network — friends, real estate agents, developers, lenders — to close deals. Recently, select companies offering immigration, banking or travel services ventured into this space, but buying foreign real estate remained elusive to the masses. “It was very inefficient for Chinese to invest overseas,” Huang said. “Our website is seven to eight times more efficient.”

After perusing pictures on the website and app, users can click through links and purchase a foreign home without ever seeing it in person. Founded in 2015, Uoolu has more than 350,000 monthly unique visitors, making it China’s largest online foreign real estate company based on web traffic, according to Huang.

I had to be entrepreneurial… It’s a golden opportunity.
— Huang Xiao Dan, Uoolu

Huang said China’s wealthy are skewing younger in age, are better educated and are more international; supportive trends for an online business. Additionally, he said Chinese policymakers encourage foreign investment. And as the domestic real estate market cools and the renminbi (RMB) internationalizes, more buyers look internationally.

Foreign countries, however, do not always appreciate the cash influx. New laws in Australia limit international investors when acquiring second homes and some Southeast Asian nations restrict foreigners to minority stakes in land ownership.

Most countries, though, are relatively open to foreign investment, welcoming the tax revenue. And Huang sees upside. “Over 3, 5, 10 years, global asset allocation could become one of the largest opportunities in Chinese wealth management,” he said.

Huang, who is 34, previously worked in traditional real estate, but switched as the industry and technology evolved. “I had to be entrepreneurial,” he said. “It’s a golden opportunity.”