Article / 24 March 2015 at 13:15 GMT

Chasing the Chinese student dollar

China Watcher / Shanghai
China
  • JD.com has followed a strong trend in China , financing students needs
  • China has a relatively high average annual spending of RMB 11,347 ($1,827)
  • Renren.com has also launched a micro credit business to target students

By Neil Flynn

Online retail giant JD.com has invested an undisclosed amount of capital into the student micro credit site Fenqile. The site predominantly targets students and allows them to borrow money in order to purchase electronics from sites such as JD.com and Tmall, and choose a repayment plan with varying interest rates. 

Fenqile covers over 3,000 universities in around 260 cities in China, with 6,000 offline staff conducting buyer credit assessments by checking student IDs and basic information.

From JD.com’s perspective, it is a good investment, because although it already has its own payment plan system, Fenqile gives it access to a huge demographic of students. 

In addition, JD.com has long partnered with Fenqile to sell its products, and the micro credit firm has since become one of JD.com’s largest distribution partners. The deal will also likely see Fenqile source products from JD.com at a lower cost, and have access to JD.com’s and Tencent’s credit datasets, which is second only to Alibaba’s in terms of quality.

China’s university enrolment rate was around 5% in the early 1990s and had grown to around 76% by 2013, meaning that there are around 30m students in China. 

Despite students having a globally recognised reputation of being cash poor, China’s students are relatively wealthy, with 2013 average annual spending being around 11,347 RMB ($1,827), which is approximately half of the annual disposable income of Chinese urban citizens.

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Big consumers: Students have shown a penchant for fashion and electronics. Photo: Istock

This is because Chinese parents tend to spend heavily on their only child’s education, and this is also supplemented by income from part-time work. As a demographic, students are very responsive to changes in fashionable and technological trends, and have a low saving rate. This makes students the ideal demographic for China’s online retail giants. 

In celebration of the strategic investment, Fenqile is offering users up to 3,000 RMB of loans without service fees to spend on JD.com, which should see a notable spending increase on JD.com at the end of the first quarter.

Fenqile allows students to buy expensive electronics with payment plans
Fengqile Offers Payment Plans On Electronic Goods
Source: Fenqile

Renren capitalising on popularity

The student micro credit industry is something that I discussed in December, as China’s Facebook clone and once leading social networking site Renren.com has launched a micro credit business to target students. 

The firm has been trying to monetise its student user base, as Momo and WeChat have taken its popularity in the social networking industry. Group buying and online video business lines have been sold off, and the firm is actively focusing on its Fenqi micro credit business, as it remains popular amongst China’s domestic university students.

During its fourth quarter earnings conference call, Renren’s management discussed how the business has expanded to cover around 2,000 universities and colleges in 129 cities since its launch four months ago, and fourth quarter internet value added services grew 33% annually, predominantly due to revenue from Fenqi. 

Renren will be hoping that this growth will continue to cause operating losses to decrease, as there is still scope for the business to grow, both geographically and in terms of the services on offer. 

The products on offer were originally consumer electronics and cosmetics, but this has been expanded to selected fashion items, and I expect to see further product lines added over the coming quarters.

The problem for Renren is that as bigger micro credit firms partner with major online retailers, they will likely be able to offer better payment plans to consumers, which would leave the firm with another business line that has been unsuccessful as larger rivals grow. 

However, the benefit that Renren has over its rivals is that its users have likely been using its services for several years, giving it access to much more data than its rivals, which should allow the firm to generate better credit scores and more targeted advertising than the majority of its rivals.

Rapidly growing industry with inherent risks

Whilst micro credit and payday loan companies are relatively common in the West, it’s a new industry in China, and there is a lot of potential. China’s banks don’t typically lend to individuals or small businesses, and has such caused a rapid growth in China’s shadow banking industry over the past decade, and been the cause of perpetual concern over China’s debt levels. 

2015 will see market forces reform the opaque industry, as the government has granted licenses to several firms, including tech giants Alibaba and Tencent, to offer loans and credit to individuals and SMEs.

Alibaba is using payment history through its market leading payment app Alipay to calculate a user’s credit score on its Sesame Credit platform, which will be the best credit data in China. Using this, it will offer loans and credit through its Ant Financial subsidiary. 

Tencent will do the same through its WeChat Pay feature, but because its dataset isn’t as large as Alibaba’s, it will likely sell the data to third party financial firms rather than focus on loans.

With a new industry comes inherent risks, and the biggest risk in student financing is that it has very little regulation. 

Micro credit firms require heavy investment in order to build a capital base to allow them to lend to consumers, and 2014 saw a huge increase in private funding. Whilst the industry will grow rapidly throughout the year, there is an ethical and legal risk in offering payment plans for expensive goods to a financially naïve demographic, and I would expect that rapid growth in the industry will eventually be stemmed by heavy government regulation.

As we’ve seen in the West, micro credit loans can lead to borrowers facing huge levels of debt within a relatively short space of time, even despite heavy regulation. In China’s consumption driven society where brands are ever so important, the government will likely move sooner rather than later to place heavy regulations on the industry before student debt balloons.

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 Tsinghua University is perhaps China's most august academic establishment. Photo: istock

-- Edited by Adam Courtenay

Neil Flynn is a portfolio manager at Alcuin Asset Management. Follow Neil or post your comment below to engage with Saxo Bank's social trading platform.

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