Fintech Operations of Chinese Internet Giants Undermine Credit Ratings: Moody’s

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Moody’s Investors Services says that the Fintech operations provided by China’s leading Internet companies serve to weaken their credit quality and ratings.

In a recent report Moody’s pointed out that the finance operations of many Chinese Internet firm are undermining their credit quality, because they are usually debt-funded, do not generate significant profits, and do not provide a track record of timely loan repayment on the part of borrowers.

This impact is particularly pronounced if finance operations are consolidated in the financial reports of Internet firms.

According to the Moody’s report entitled “Internet companies – China: Finance operations weaken credit quality; most companies have mitigates,” the Fintech operations of Chinese Internet companies typically assume three primary forms: allowing consumers to make purchases via their platforms, the extension of loans to both consumers and vendors that serve as the user base for platforms, and the distribution of wealth management products.

Lina Choi, a Moody’s Vice President and Senior Credit Office, say that the final two are particularly problematic for the credit quality of Internet companies.

“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 Choi.

“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.”

Four Chinese Internet companies out of the five covered by Moody’s engage in finance operations, which have a significant impact on their credit quality and ratings.

These companies are e-commerce giant Alibaba Group Holdings (A1 stable), online search engine Baidu Inc. (A3 negative), as well as Internet vendors JD.com, Inc. (Baa3 positive) and Vipshop Holdings Limited (Baa1 stable).

According to Moody’s because Alibaba’s finance operations are conducted via an affiliate that is not consolidate on its balance, its level of exposure to risk is lower than other companies.

Moody’s points out, however, that reciprocal benefits between the financial operations and the core business of Chinese Internet companies serve to partially offset risk, by providing stronger cash flow, revenues and transaction volume.

The data on both consumers and vendors that Internet companies amass via their online platforms can also improve their associated finance operations by providing a type of credit record for applicants.

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