Chinese Internet Companies with Finance Operations May Suffer Weak Credit Quality

Chinese internet companies that conduct finance operations may be weakening their credit quality. Finance operations offer loans to consumers and merchants, distribute wealth management products and allow consumers to make purchases on a company’s platform. But if they are consolidated into the company’s financials, they are usually funded by debt, do not produce meaningful profits and lack a track record of borrowers making timely repayment of loans, according to a new report from Moody’s Investors Service.

“Loans to consumers and merchants and distribution of wealth management products—two of the primary services that finance operations provide—can also lead to contingent liabilities and potential capital calls for internet companies,” said Lina Choi, a Moody’s vice president and senior credit officer. “These risks will persist even after the finance operations are deconsolidated, although further removed from the core business. The loans and wealth management services will still be offered with the internet companies’ brand names, and the strategic relationship between the core and finance operations remains.”

Of the five rated Chinese internet companies, four have finance operations: e-commerce platform Alibaba, search engine Baidu, and online retailers and Vipshop Holdings Limited.

Risks are mitigated, however, due to strong liquidity and the synergies between each company’s core business and the finance operation. Alibaba, and Vipshop can generate higher transaction volumes and cash flow through the loans  that they provide to those who conduct business on their platforms. Data gathered on consumers and merchants assist in determining to whom loans are offered and how much.

Alibaba’s risk exposure is lower than the other three companies because its finance operation is an associate company rather than consolidated in its financials. Baidu has a large cash buffer against capital calls, and both Baidu and Alibaba have larger cash buffers than and Vipshop, Moody’s said.

– Adam Fusco, associate editor

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